The Pound-to-Dollar Rate Rally Has Further to Run says Commerzbank 

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- GBPUSD set for further gains, say Commerzbank and ING Group

- As technicals and DUP, Brexiteer compromise, draws market's bid.

- But market is in danger of getting ahead of itself, says MUFG analyst.

The Pound-to-Dollar rate could rise even further over the coming days, according to analysts at Commerzbank, who say technical factors could soon drive the British currency to a three-month high against the U.S. greenback.  

Commerzbank's call comes as traders cheer a report in The Sun newspaper suggesting the Democratic Unionist (DUP) Party have agreed to support Prime Minister Theresa May's EU exit proposal in the next parliamentary vote if the contentious "Northern Irish backstop" is made time-limited. 

"GBP/USD met and soared through its initial target of the 200 day moving average at 1.3065. While underpinned by the near term uptrend, today at 1.2894 it stays bid and we look for gains to the 55 week moving average at 1.3304," says Karen Jones, head of technical analysis at Commerzbank. 

Friday's report from The Sun came at a time when Pound Sterling was already topping the G10 currency league table in response to growing suspicions among traders that PM May would soon ask Brussels for an extension of the Article 50 EU exit period to run from March 29 to a currently unknown date. 

The market's view is that could ultimately lead to a second referendum, a Brexit-cancelling election or some other kind of exit-nullifying agreement between the political parties in Westminster, which would remove the Brexit-shaped Damocles Sword that's been hanging over Sterling since June 2016.

"Here [at 1.3304] we also find the July, September and October highs at 1.3258/1.3363," Jones says. "A rise above the July, September and October highs at 1.3258/1.3363 would put the June high at 1.3473 on the cards."

Above: Pound-to-Dollar rate shown at hourly intervals.

Traders care about The Sun report and the odds of an Article 50 extension because both would eliminate any scope for an immediate "no deal Brexit" on March 29 that would see the UK  leave the EU and default to doing business with it on World Trade Organization terms, which politicians and economists say would be bad for growth.

Momentum behind the British currency's rally has been building all week, with many analysts saying the rising odds of the Article 50 being extended would likely lead Brexit-supporting opponents of the Prime Minister's exit proposals to fall into line behind her to reduce the odds of Brexit being cancelled altogether. 

"Sterling continues strengthening and reached the highest level against EUR since 2Q17 in response to the news that the DUP is shifting its support towards PM May’s deal," says Petr Krpata, a strategist at ING Group. "These dynamics suggest more upside to GBP today."

The Pound was actually quoted -0.30% lower at 1.3078 against the Dollar during morning trading Friday, although analysts had warned earlier that "profit-taking" around these levels could see the rally stall briefly. 

Above: Pound-to-Dollar rate shown at daily intervals.

"Although there are still not enough votes for PM May’s deal to be passed in Parliament, with many MPs shifting away from the notion of no deal, this materially diminishes the odds of such a scenario and it turn supports the oversold and heavily under-valued (on a medium term basis) sterling," Krpata explains, in a note to clients. 

Pound Sterling is now up 2.64% against the Dollar for 2019 and Commerzbank as well as the ING team say further gains are likely over the coming days. So too do other analysts, although some are being a bit more cautious when it comes to the outlook. 

This is because even with the Democratic Unionist Party supporting the Prime Minister's deal, she still lacks a suffcient number of votes to get it approved in the House of Commons. The agreement must be approved by a majority in both the House of Commons and House of Lords. 

The House of Commons rejected Prime Minister Theresa May's Withdrawal Agreement in a landslide vote on January 15, which saw 432 of the House's 650 MPs vote against it. Just 202 members of parliament voted in favour of the deal, so the PM needs more than 100 additional votes to see it pass, and the DUP offers only 10 votes.

"The developments breathe new life into PM May’s attempts to pass her Brexit deal although she still faces a formidable challenge after it was initially defeated by 230 votes, and she still has to secure concessions from the EU to limit the backstop. It poses the risk that market participants could be getting ahead of themselves in pricing out “No Deal” Brexit risk in the near-term," warns Lee Hardman, a currency analyst at MUFG. 

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