The British pound rose back towards $1.31 on Monday, although trading was quiet in the absence of any significant Brexit-related developments as the Conservative and opposition Labour parties continue their talks.
Volatility in the pound has collapsed since European Union leaders and the British government last week announced Brexit would be delayed for up to six months.
That removed the immediate risk of a no-deal Brexit but also raised the possibility of months of political uncertainty in Britain as politicians struggle to agree over how best – or whether at all – to leave the EU.
Britain’s Foreign Secretary Jeremy Hunt said on Monday that talks between the government and the opposition Labour Party to find consensus over a Brexit plan are more constructive than people think.
Goldman Sachs analysts said they believed there was still more upside than downside for the pound so long as the market focused on Brexit negotiations rather than macroeconomic news.
“Another extension to the Article 50 deadline lowers the probability of a quick resolution to the Brexit impasse, but we think the market seems to be taking this too far,” they wrote in a note sent to clients.
“While slow, we see signs of progress in the negotiations, so there remains a meaningful chance that there is some resolution before the May 22 deadline.”
Sterling rose 0.2 percent to $1.3106 by 0840 GMT. Against the euro the pound was little changed at 86.385 pence per euro.
This week will offers more clues as to how the British economy is holding up in the face of prolonged British uncertainty.
On Tuesday, labour market data is published while Wednesday sees inflation numbers for March released.
RBC’s Head of Asia FX strategy, Sue Trinh, said in a note that “The UK labour market remains tight which should be reflected in the data on Tuesday.”