(Bloomberg) -- After weeks of treading water, the pound is gearing up to break out of a tight trading range.
The big question is whether it'll rise beyond $1.30, or fall below $1.26, the two key levels that have wedged it in place since Sept. 9.
First, the case for a rally.
A breakthrough when U.K. Prime Minister Boris Johnson's meets European Commission President Ursula von der Leyen on Saturday could see the pound strengthen to a four-week high as institutional investors unwind their short positions and hedge funds chase the market.
The mood is already improving. Pound traders remain bearish yet sentiment for the week ahead has picked up markedly since mid-September, according to risk reversals, a gauge of market positioning. The currency rose as much as 0.5% to $1.2954 on Friday before paring gains.
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Yet Brexit is far from a done deal. Should the impasse continue, the pound may retreat about 1% toward $1.28. A possible break below the $1.2676 low seen on Sept. 23 would come down to sterling's higher volatility versus the dollar, euro and Japanese yen.
Add then there's U.S. President Donald Trump's Covid-19 diagnosis and the implications for the U.S. election. The pound could weaken if there's a rush to buy havens, given the worsening outlook for the U.K. economy.
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Pivotal support for the currency would come around $1.26 as the next key Fibonacci retracement of its gains since March comes at $1.2203.
As for where the pound ends the year, Bloomberg's options-pricing model assigns the same probability for the currency to trade 5% in either direction.
- NOTE: Vassilis Karamanis is an FX and rates strategist who writes for Bloomberg. The observations he makes are his own and are not intended as investment advice
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