BUZZ-COMMENT-Potential big week for sterling, as Brexit resurfaces

Credit: REUTERS/VALENTYN OGIRENKO

This could be a pivotal week for sterling, the Brexit deal, and Britain's relations with the European Union. A trade war is a real possibility, unless there is an unlikely compromise.

Oct 11 (Reuters) - This could be a pivotal week for sterling, the Brexit deal, and Britain's relations with the European Union. A trade war is a real possibility, unless there is an unlikely compromise.

The UK is refusing to fully implement the Brexit agreement, insisting on a "significant change" to the Northern Ireland protocol .

The EU cannot set a precedent by ending the role of the European Court of Justice in the Northern Ireland protocol and EU border, as that could open the door to other EU member issues in the future .

Europe remains the UK's number one market, so a trade war or increased restrictions would be strongly sterling-negative.

The Bank of England restated its hawkish stance over the weekend, but a 2021 rate rise is already more than 90% priced by markets. BoE policymaker Michael Saunders told households to prepare for "significantly earlier" interest rate rises as inflation pressure mounts . BoE Governor Andrew Bailey said that above-target inflation is concerning and is going to go higher .

The BoE are certainly more hawkish than the European Central Bank , providing underlying sterling support.

Technically, GBP/USD is trading near the middle of its September range, with conflicting 5, 10 and 21 day moving averages, while 21-day Bollinger bands contract. This is a neutral setup, so sterling has plenty of room to respond to events.

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(Andrew Spencer is a Reuters market analyst. The views expressed are his own. Editing by Sonali Desai)

((Andrew.m.spencer@thomsonreuters.com))

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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