The pound sterling is hanging on to gains made against the dollar this week, and if a European Union (EU) withdrawal bill is passed next week, a positive trajectory lies ahead, analysts said Friday.
"We have been arguing that the political uncertainty is curtailing our enthusiasm for the pound, but that might be changing. Market participants may soon be able to trade on macro-fundamentals again," said Derek Halpenny, European head of global markets research at MUFG in a client note.
"If we get beyond Tuesday/Wednesday without any major surprise in parliament and if the EU accepts the document now in its possession the prospects for the pound will suddenly brighten again."
The current outlook also reflects relief that domestic political uncertainty hasn't deteriorated further, Halpenny said.
Sterling saw small gains from its lowest point in more than six months — 1.3241 at the tail end of May — going into the first week of June, reaching 1.3438 against the dollar on Thursday before slipping to 1.3400 at 1:20 p.m. London time Friday.
The currency is down 10 percent since the U.K.'s June 2016 vote to leave the EU, but analysts expect much of that loss to be regained with eventual interest rate rises and a Brexit deal that is accepted by all parties.
A Reuters poll from last week forecast sterling reaching $1.35 in six months and $1.41 in a year. This is still shy of the post-Brexit peak of $1.43 reached in mid-April amid expectations that the Bank of England would raise interest rates in May. It ended up voting to leave rates unchanged, although its Monetary Policy Committee recently signaled a likely rate rise in August.
The all-important EU withdrawal bill has undergone numerous changes and was defeated 15 times in the U.K. Parliament's House of Lords. Next week will see the final stage of its passage through the legislature.
Protracted Brexit negotiations and disagreements have plagued the pound, as politicians failed to reach a consensus over some of the thorniest issues that need solving: the question of the Irish border and the customs union, and the trade area encompassing all EU member states that enables the free movement of people and goods.
Uncertainty remains, as rifts in Prime Minister Theresa May's Conservative party could see some of its ranks voting with the Labour party to defeat the government's bill. Labour and some of those Conservative parliament members favor establishing a new customs arrangement to avoid friction with the EU when the U.K. officially leaves in March 2019.