Above: Boris Johnson. File image. BackBoris2012 Campaign. Access: Flickr. Creative Commons License.

- GBP/EUR @ 1.1156 | GBP/USD @ 1.2454

- EU officials see +50% chance of 'no deal' Brexit

- No case for buying Sterling here says one analyst

Investors are engaged in a wait-and-see approach to Pound Sterling in what promises to be a significant week in British politics: a new Prime Minister and Government will be installed, and with them comes a new Brexit strategy that should set the tone for the under-pressure currency.

Sterling remains highly sensitive to Brexit headlines and sentiment, suffering notable losses against the Euro, U.S. Dollar and other major currencies over recent weeks as the odds of a 'no deal' exit have grown.

This reliance on Brexit-related news-flow will remain intact, we believe.

It has been revealed that European Union officials now believe a 'no deal' exit is the most likely outcome, and the Times reports an aid package is being readied to support Ireland against the negative impacts of the UK exiting the EU without a deal.

According to the report, the European Commission is drawing up a multibillion pound aid package for Ireland to offset the economic damage of a 'no deal' Brexit. The EU would “spend whatever was necessary” to support the Irish government through any disruption of trade, said a senior EU diplomat.

The report adds European leaders have privately told Boris Johnson - favourite to succeed May on Wednesday - that he risks scuppering any prospect of averting a 'no deal' Brexit by making “totally unrealistic” demands over the Irish backstop.

The Pound has come under increased pressure since May when it became clear Prime Minister Theresa May's attempts to secure a negotiated Brexit had failed to pass through Parliament. The failure made her position untenable and the rise of Johnson and his desire to see the Northern Ireland backstop removed from any future deal lead markets to increase bets that a 'no deal' Brexit had increased.

Charles Grant, director of the Centre for European Reform, told the Times that EU figures were increasingly pessimistic about a deal being done: "I would say that, having talked to senior figures in Brussels and other European capitals, they now believe no-deal is more likely than not."

Amidst growing pessimism for a negotiated exit, the Pound-to-Euro exchange rate last week recorded its lowest level since January when it fell to 1.1049 before recovering back above 1.11.

"I still think EUR/GBP reaches 0.95 but not parity on a no-deal exit, but there isn't a case for buying Sterling here," says Kit Juckes, a foreign exchange strategist with Société Générale in London. 0.95 in EUR/GBP gives a GBP/EUR rate at 1.0526.

The Pound-to-Dollar exchange rate meanwhile triggered two-year lows at 1.2382, before recovering back above 1.25. "The trend remains down, especially as other rates look more USD positive this week. 1.2350-1.2300 is seen as interim support ahead of the key 1.22-1.20 support region," says Robin Wilkin, a cross-asset strategist with Lloyds Bank.

Voting in the Conservative leadership election closed at 5pm Monday, and the result will be made public at 11:00 B.S.T. on Tuesday.

The transfer of power should then take place on Wednesday afternoon after Theresa May's final prime minister's questions.

"Brexit will obviously be the dominant immediate issue for the new PM. With a Johnson win probably already almost fully discounted that outcome may have little initial impact on markets. However, markets will be looking for early indications on his plans for negotiations with the EU. Media reports already suggest that Johnson will transfer responsibility for Brexit talks to the Cabinet Office with the Brexit department now set to concentrate on ‘no-deal’ planning," says Lloyds Bank's Wilkin.

Markets will want to see more details from the incoming Prime Minister before they press the buy or sell button on Sterling and propel the currency into another big move.

Our technical forecasts covering the coming week shows the Pound-Euro exchange rate looks evenly balanced and that the GBP/EUR pair "is at an inflection point from which it could break in either direction." However, our Technicals Editor Joaquin Monfort would say that on balance a preference must be held for expecting further downside due to the prevailing downside trend of the market.

Details on Brexit policy will be key to determining where any breakout proceeds.

Johnson said on Sunday the country could leave the European Union by agreeing a free trade agreement that would remove the need for the Northern Irish backstop.

Writing in the Telegraph, Johnson said technology could avoid the need for the Northern Irish backstop to remain a part of the Brexit deal.

"There is abundant scope to find the solutions necessary - and they can and will be found, in the context of the Free Trade Agreement that we will negotiate with the EU ... after we have left on October 31," he wrote in his column.

"We can come out of the EU on October 31, and yes, we certainly have the technology to do so. What we need now is the will and the drive."

However, speaking to the BBC on Sunday, Ireland's foreign minister Simon Coveney said the backstop simply cannot be replaced, repeating the EU's stance that existing deal is not up for renegotiation.

It is hard to see Sterling engaging in any concerted recovery while this most vexing of issues remains unsolved. It is also clear to see that any solution remains some way off.

"We understand that a change in the Withdrawal Agreement now essentially only requires Ireland's approval. Assuming an A50 extension, we think a new EU Commission will facilitate the climb-down. Importantly, we note incoming Commission President von der Leyen strongly opposes No Deal, and could be a key player to help facilitate this process. A “time-line” instead of a “time-limit” might be one solution, but these expectations remain highly fluid," says Ned Rumpeltin, European Head of FX Strategy at TD Securities.

And it's not just Brexit that will likely keep a lid on Sterling: the odds of a General Election taking place in 2019 have also increased, adding another layer of uncertainty to the mix.

Johnson's commitment to deliver Brexit by October 31 'at all costs' will set him on a collision course with those members of his own party that are fundamentally opposed to leaving the EU without a deal.

"GBP traders will have their eyes trained on the first few days - or possibly even hours - in office of Johnson as Prime Minister, as resistance in the House of Commons - including his own Tory party - is immense. That makes a Johnson government contestable, as the Tories do not enjoy a majority in the House of Commons," says Esther Reichelt, FX Analyst with Commerzbank..

Johnson will try to rule with a majority of just two, and if MPs quit the party in protest to an unpopular Brexit policy - as has been threatened - it will soon become abundantly clear that a General Election must be called in order to restore some functionality to government.

"EUR/GBP will remain anchored around 0.91 for the foreseeable future, suggesting a slightly weaker Pound against its main European counterpart as the ongoing Brexit process takes its toll. As always, these levels represent our best estimate of the risk-adjusted fair value for the GBP over these horizons," says Rupeltin.

EUR/GBP at 0.91 translates into GBP/EUR at 1.0990.

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