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GBP/USD posted 3-week highs at 1.2285 on Friday as the US currency came under pressure and sentiment on the sterling remained more positive following German Chancellor Merkel's hopes that some form of amended Brexit deal could be secured before October 31st.
Brexit rhetoric hardened slightly during the G7 Summit with EU Council President Tusk and UK Prime Minister Johnson looking to pin the blame on each other for any failure to reach a deal. However, it will be necessary to monitor rhetoric from national leaders to assess whether the wider EU mandate will be adjusted.
UK parliamentary opposition leaders will meet on Tuesday to discuss ways of avoiding a 'no-deal' Brexit outcome. Strong rhetoric from opposition policymakers would tend to provide the sterling with support.
Prime Minister Johnson has a weak majority in the House of Commons and Parliament is likely to exert its authority to block any efforts to prevent it being suspended in the run-up to October 31st.
Fears over the global economic outlook will tend to limit the sterling support and cap gains.
The UK inflation is, however, just above the 2.0% target and is set to accelerate further given the impact of the recent sterling's depreciation and a faster pace of wage growth. In this context, the Bank of England has little scope for a rate cut on inflation grounds.
Over the past few trading sessions, there has been net outperformance for the sterling and the Canadian dollar with inflation in these countries just above the target. On the other hand, countries with inflation below the target have tended to lose support. This element will help protect the UK currency, especially with the dollar losing net support.
GBP/USD retreated as the US currency recovered ground, but found support just above 1.2200 and traded near 1.2220 on Tuesday.
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