Above: Chief E.U. Brexit negotiator Michel Barnier might have conceded to the U.K.'s wishes on the backstop agreement © European Union, 2018 / Source: EC - Audiovisual Service / Photo: Etienne Ansotte.

The British Pound suffered a sharp sell-off ahead of the weekend amidst no signs of a promised breakthrough in Brexit negotiations which left the Pound-to-Euro exchange rate back below the key 1.14 level.

The market closed at 1.1357, having been as high as 1.1462.

Foreign exchange strategists at global investment bank TD Securities have however suggested the Pound-to-Euro exchange rate could well break out of a key long-term range should a Brexit deal be announced in the coming week, ensuring the hard 'no deal' Brexit scenario is overcome.

The move would bring those looking to buy Euros the strongest level in Sterling since April 2017.

The call by TD Securities comes amidst heightened tensions as E.U. and U.K. negotiators work around the clock to deliver a deal ahead of a landmark meeting of E.U. leaders in Brussels on October 17.

We have heard through the week that a Brexit deal is imminent but ahead of the weekend no clear signs of a deal were forthcoming. Hopes that a breakthrough will be reached in the coming week do however remain alive.

"We think an early deal on the Withdrawal Agreement should be very good news for Sterling - news that is not quite in the price," says James Rossiter, Senior Global Strategist with TD Securities in London.

The reason markets are loath to price in any 'good news' is due to the complex web of competing domestic interests on Brexit which ensure Prime Minister Theresa May faces many points of resistance. The main resistance appears to be coming from Conservative party members who are opposed to an indefinite backstop agreement being agreed that could potentially lock the U.K. into a customs union with the E.U. if trade negotiations fail.

Northern Ireland's DUP - partners of May's Conservatives in parliament - are also threatening to withdraw support for the government if their demands are not met.

"A buoyant Pound heads into next week’s key October E.U. summit trading on the sentiment that a Brexit Withdrawal Agreement is almost done. But we wouldn’t be surprised if there’s some degree of lingering scepticism – not least with the Salzburg disappointment fresh in investors’ minds and the seemingly trivial, yet significant, U.K. political hurdles that still need to be overcome," says Viraj Patel, a foreign exchange strategist with ING Bank N.V. in London.

While Sterling has been the best performing major currency over the past month, caution ensures these gains are capped. Good news on a Brexit deal could however flush out a good portion of negative bets on the Pound from the market.

Above: Sterling's performance over the past month (past 20 trading days).

The question of the Irish border remains key to why markets are still coy on the Pound, with a proposed backstop solution from the E.U. being a major sticking point.

The proposal seeks to keep Northern Ireland in the single customs union in the event of no trade deal being reached during the two year transition period. This would create a de facto border between Northern Ireland and Britain, something the DUP are passionately opposed to.

The Telegraph however reports the E.U. have agreed to an all-U.K. backstop which will be triggered in the event of no trade deal being struck during the two-year transition period.

This crucially means there is no Irish backstop and the integrity of the U.K. should be guaranteed; recall that it was fears of a divergence between Britain and Northern Ireland that lead Northern Ireland's DUP to threaten to vote against the government's budget, which would ultimately likely bring the government down.

That the U.K. will remain united in a revised backstop could well unblock the resistance being put up by the DUP, and ensure the government survives and a deal is pushed through parliament.

But, we are hearing the U.K. are adamant that any backstop should have a time limit attached to it and not be open-ended, as the E.U. apparently favour. The big question now is whether or not the E.U. will concede to this demand.

If they do, "we think GBP could rally sharply against the USD, EUR and other major trading partners," says Rossiter.

TD Securities believe if negotiators clear the final hurdles on the Withdrawal Agreement, it's likely that Brexit Secretary Dominic Raab will travel to Brussels on Monday, October 15 for a meeting with the EU's Michel Barnier.

Here, they would approve the final proposals which will then be passed up to EU leaders for discussion at their dinner on Wednesday, October 17.

"It looks increasingly likely that if significant progress has been made on the Withdrawal Agreement as we expect, then EU leaders will tentatively (and informally) approve the core text of it next week," says Rossiter.

If a deal is announced, "we would not be surprised to see EUR/GBP break support around the 0.87 mark ahead of a test of 0.8620," says Rossiter.

A break of support at 0.87 translates into a break of resistance at 1.15 in Pound-to-Euro terms, a test of 0.8620 translates into 1.16.

The above shows the 1.16 April high is a key hurdle in the market with analysts believing there is a good array of sell orders (EURGBP buy orders) in the vicinity. Breaking through these orders would be a significant moment for the market.

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