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 nL1N2R50H2.
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 nL1N2R6057.
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 nL1N2R50E1. BoE Governor Andrew Bailey said that above-target inflation is concerning and is going to go higher nL1N2R42MU.
The BoE are certainly more hawkish than the European Central Bank nB5N2N803K, 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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