Sterling is still down by over 10 percent since the U.K. voted to leave the European Union in June 2016. The process to leave the bloc has proven long and rich in technical details. The departure date has been scheduled for March 29 next year — meaning that negotiators have just over four months to conclude negotiations on aspects such as the movement of people and goods across the border between Northern Ireland and the Republic of Ireland.
Despite the draft deal this week, there are a number of steps ahead and each step could impact the trade in sterling. Jordan Rochester, an global fx strategist at Nomura, said in a client note Tuesday that sterling will go up to $1.3250 if the cabinet is on board with May. The next step, as he says, will be to deal with potential resignations which could be a "headache for GBP."
But if sterling is able to get through Parliament, Rochester expects "we'll be in a $1.35 to $1.40 range when it is passed by year-end."
The next step, Rochester said, will be figuring out what the Bank of England will do in 2019. "Hikes will be in the pipeline, just a matter of timing." In this case, sterling will rally to $1.50 levels by end-2019, he added.
Sterling fell 0.4 percent on Wednesday to trade at $1.2927, a move traders attributed to a Telegraph newspaper reporter saying that the British attorney general had raised significant concerns about the customs union backstop review mechanism, Reuters reported. The currency later pared its losses to trade at $1.2962. On Tuesday, sterling posted its biggest jump in two weeks after it rallied more than 1 percent to $1.3047.
—CNBC's Holly Ellyatt contributed to this story.