Volatility will remain a fact of life for foreign currency buyers in 2018 but the more positive direction of Brexit talks could support a continued recovery of the Pound.

This is in part because “Peak Brexit pessimism” may have already been reached, which could mean further losses are limited, while the bar to positive surprises coming from the economy is set low. Monetary policy may also provide some support to the Pound during the year ahead.

“The consensus is already heavily skewed, so the bar is relatively low for a positive surprise and for Sterling to retrace part of its post EU Referendum losses,” says Ross Walker, a senior UK economist with Natwest Markets, the investment bank of Royal Bank of Scotland.

Natwest’s forecasts for Bank of England interest rate hikes suggest current market-implied expectations, which are sceptical of even one rate hike in the year ahead, may be forced to play catch-up with a Bank of England that surprises with two more rate rises.

“How Sterling performs in 2018 will be function of the size of the current risk premium applied to the currency and the extent to which it can fluctuate on Brexit developments,” Walker adds. “The destination of Brexit is uncertain and the path to Brexit is also uncertain. So it’s clear that uncertainty is very high. This also means that Sterling’s risk-premium is equally as high.”

Natwest forecasts the Euro-to-Pound exchange rate to fall by the end of 2018. Foreign currency buyers are also likely to see broad sideways movement in the Pound-to-Dollar rate and substantial gains for Sterling over the Japanese Yen - all of which implies at least a mildly positive view of the likely trajectory of exit negotiations between the UK and the EU.

“Directionally, we favour GBP/JPY upside which we see as a potential +10% trade for 2018 given the direction of travel of Brexit, a more stable economy and a still bearish Sterling consensus,” says Paul Robson, a currency strategist at Natwest Markets.

With the double digit gain for GBP/JPY aside, Robson says the 2018 year for EUR/GBP is likely to be characterised by volatility but that the rate should drift toward 0.8600 pence by year-end, which puts the Pound-to-Euro rate at 1.1627.

“Modest Sterling trade weighted gains are expected, with GBP/USD gravitating towards 1.35/40 and EUR/GBP to 0.86. However, risks are seen becoming more two way from late summer, most obviously versus the EUR on central bank policy, Brexit and politics,” Robson adds.

Robson and Walker’s predictions came at a time when Prime Minister Theresa May was said by many to have achieved a victory in the Brexit negotiations, with an agreement that could see talks on trade and transition to the new-relationship model begin as early as next week.

“There are still many obstacles to overcome, but this supports our view that uncertainty could ease somewhat in 2018,” says Paul Hollingsworth, a senior UK economist at Capital Economics.

PM May’s push for “sufficient progress” involved satisfying a series of key demands from Brussels negotiators, requiring proposals on the preservation of EU citizens rights after Brexit, the avoidance of physical infrastructure at the Northern Irish border and a “financial settlement”.

“The European Council will issue Michel Barnier with guidelines on the next phase of the negotiations,” adds Hollingsworth. “Barnier re-affirmed that he hopes to have the withdrawal agreement concluded by October next year, to allow enough time for ratification.”

Securing an early agreement on trade and transition is seen by many strategists as key if the UK is to avoid a disorderly Brexit, where it leaves the EU without an agreement on future trade relations and some financial services firms are forced to relocate parts of their operations and some staff over to the continent.

The Pound-to-Euro rate was quoted 0.11% higher at 1.1380 during early trading in London Monday while the Pound-to-Dollar rate was marked 0.26% higher at 1.3409.

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