With Brexit talks set to move on, the EUR/GBP exchange rate is headed lower and Sterling could go back to basics and be propelled by more traditional drivers.

This comes after Prime Minister Theresa May reached an agreement covering the rights of EU citizens after Brexit, a “divorce bill” and the handling of the Northern Irish border, with European Union officials.

Expectations are that this should enable Brexit negotiations to progress to the subjects of trade and transition following the European Council meeting of December 14.

Sterling has risen strongly against its G10 rivals after the agreement became public and could be set for further gains, although opinions are divided on the question of how much further it can go in the short term.

“The GBP has rallied against nearly the entire range of G10 and major EM currencies in their wake,” says James Rossiter, a senior strategist at TD Securities. “Within this, however, we note some variation.”

Gains over the US Dollar were less pronounced than they were for other currency pairs while, since the early hours of the London session, the Pound-to-Dollar rate has ceded ground to trade at a loss.

“Cable has underperformed as the US Congress has passed a short-term spending bill that averts an imminent shutdown of the US government,” says Rossiter. “This, we think, accounts for most of the rise in GBPJPY, as the underlying USD component has implicitly propelled most of this gain.”

The debt ceiling-development in Washington is important because Pound-to-Dollar price action is a key determinant of many other Sterling exchange rates - including Pound-to-Euro.

“This underscores our preference for being highly focused when addressing Brexit-related risks. In line with this, the move lower in EURGBP through key support at 0.8733 suggests a break into a new, lower, trading range,” Rossiter adds.

The 0.8733 level for EUR/GBP translates to a Pound-to-Euro exchange rate of 1.1450, which now represents a floor level for Sterling, according to Rossiter’s analysis.

“Looking lower, we note that 0.8693 represents the 50% Fibonacci retracement level of the trading range in place since April,” the strategist writes in a research note Friday. “Below this, we think the June lows around 0.8650 are likely to be the next attractor to the downside.”

Rossiter’s comment implies the Pound to Euro rate is headed to 1.1500 and above, although it may need to challenge this level several times before it can hold its ground above that point. Beyond there, 1.1550 looks to be the next target for the exchange rate, according to Rossiter.

With the second leg of Brexit negotiations, concerning trade and transition, now looking set to begin in December or the New Year, Brexit could fall a way down the market’s agenda for the time being.

“This suggests that market attention will revert back to more traditional drivers over the next several weeks. There, we have seen some momentum build in the UK’s macro landscape. We do not want to overstate this, however,” says Rossiter.

The prospect of a transition deal being agreed in the New Year could see bond and interest rate derivatives markets begin pricing a faster pace of Bank of England interest rate hikes than it currently does. That would put further fuel in Sterling’s proverbial tank.

“But these [expectations] will ultimately be conditioned on how the UK’s macro data evolves from here,” says Rossiter. “This, we think, may keep the market’s overall enthusiasm for the GBP somewhat subdued over the next month or two until more clarity emerges.”

The EUR/GBP rate was quoted at 0.8764 during noon trading Friday, making for a Pound-to-Euro rate of 1.1410.

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