Pound-Euro Rate's Recovery Potential Limited Beyond 1.20: AFEX

- GBP/EUR hits new 31-month high

- Can go higher says analyst at AFEX

- Fall below 1.1650 to signal trend change

Foreign exchange strategists with foreign exchange brokers AFEX say Pound Sterling is likely to remain relatively well supported against the Euro, and the strong rally in the exchange rate seen over recent weeks can potentially reach 1.20.

However, there are limits to the rally and Trevor Charsley, who conducts technical analysis for the London-based brokers, says "recovery potential looks limited much beyond 1.2000."

While recovery potential looks limited once the exchange rate achieves 1.2000, "fresh dips are also expected to prove untenable," adds Charsley.

The call comes as the Pound-to-Euro exchange rate trades at fresh 31-month highs at the start of what promises to be a pivotal week for British politics, and the Pound.

The Pound was trading higher after Monday saw the implied odds of a Conservative majority being delivered by the electorate on December 12 rose to 80% for the first time. At the time of writing GBP/EUR is quoted at 1.1870, "GBP values appear capable of extending nearer 1.1925 or so next," says Charsley."

The rising odds for a Conservative majority follow a series of weekend polls that suggest the Conservative's lead over Labour remains elevated at around 10 points. Anything above 7 points is deemed by pollsters to be enough to deliver a majority.

Charsley says Sterling should remain supported against the Euro over a "shorter term perspective given demand around 1.1800 then 1.1725 areas initially."

For Sterling to change direction and enter a downtrend against the Euro, Charsley says the exchange rate would most likely have to endure a sell-off "beneath tertiary demand at 1.1650".

For such selling pressures to emerge we would look for the election to deliver a hung parliament, an outcome that markets are now heavily unprepared for. But as always when it comes to currency markets, it is the unexpected that has the ability to really shift markets.

Nigel Greene, the CEO of deVere Group - a wealth management firm - says he is expecting the Pound’s rally will be short-lived.

"In the medium to long-term Boris Johnson’s Brexit agenda could come back to deliver another bloody nose to the currency,” says Greene. “The serious work of negotiating a trade deal only begins on January 31. There is then only 11 months to achieve this. It will be a race against the clock. Should this mammoth and complex deal not be struck before the December 2020 deadline, the UK will be forced into adopting unfavourable World Trade Organisation terms."

Greene says this uncertainty will act as a large dark cloud looming over the Pound throughout 2020, dampening any bounce.

“And should Mr Johnson ultimately fail to meet the tight deadline, the Pound, UK financial assets and economic growth will be seriously impacted,” says Greene, "Boris Johnson’s approach is likely to produce short-term gain but long-term pain for the pound."

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