Pound may target 17-month high versus euro on Brexit resolution

The pound is less than 2% away from this year’s high against the euro as investors prepare for a crucial European Union summit that gets under way in Brussels this week.

Traders have locked in their crosshairs the euro-pound’s level of 0.8621 ahead of the dinner meeting between EU leaders and UK Prime Minister Theresa May on October 17. The market remains short sterling on mediumto long-term positions, according to traders in London and Europe, meaning the currency has potential to rally should the outcome be favourable.

Options show traders are ready for turbulence in the pound, with market sentiment and positioning based on risk reversals remaining in favor of the euro as investors appear unconvinced the October EU summit will be the one that breaks the Brexit impasse.

If the market fully priced out the risk of a no-deal scenario, the euro-pound year-to-date low may be tested, beyond which sterling would trade at its strongest level versus the common currency since May 2017. In the event of a complete agreement, bulls could target the pair’s 55-monthly moving average, currently at 0.8190.

As for the euro, members of the common currency bloc including Italy send final budget plans to the European Commission for approval on Monday, meaning concern around Italian assets may persist.

Euro-area inflation figures are due October 17, and the absence of any signs of a meaningful pick up on the horizon could pose a risk for short-pound positions.

Tier-one UK economic data is also expected this week, with consumer-price growth and labour-market numbers standing out. The releases may see only a knee-jerk reaction since it is all about Brexit at the moment for market participants.