The latest UK inflation and retail sales data are due on Wednesday and Thursday respectively, but as usual, Brexit news will dominate price action in the pound. Focus remains on whether a deal can be struck in the coming days, which is very doubtful. As for the pound, the relief rally may not be over just yet, as most potential near-term outcomes seem favorable. Either a deal gets done now, or the UK gets an extension that is followed by an early election, something that could make both a future deal and a second referendum more likely.

Pathway

Markets have turned more positive on Brexit lately, after the British and Irish leaders signaled they may have found a “pathway” towards a deal. The pound skyrocketed, as traders closed some of their prior short positions, which were near extreme levels. It seems that PM Boris Johnson watered down his stance on the Irish border, breathing new life into the negotiations. The two sides have thus gone into intense talks and investors are holding their breath to see whether a deal is reached, especially after chief EU negotiator Barnier said today that a deal is still possible this week.

Alas, markets may be asking the wrong question. If Boris truly ‘blinked’ on the Irish border as much as media reports suggest – by potentially erecting a de-facto customs border along the Irish Sea – then he risks losing the blessings of his hardline Tory Brexiteers and the DUP party. He desperately needs both factions to stand any chance of pushing a deal through Parliament.

Ergo, while he may have softened his stance enough to get a deal from the EU, that agreement may be unacceptable to UK lawmakers, in a déjà vu of Theresa May’s deal being rejected multiple times.

In the economic realm, the upcoming inflation and retail sales figures will be monitored for clues around whether the Bank of England will cut rates soon. A disappointment in the inflation data seems possible, considering that the services PMI for the month showed prices charged by firms rising at the weakest pace since 2016. That said, economic data barely move the pound nowadays – the logic being that a solution to the political chaos would solve most of the economic problems too.

Back to Brexit, the next thing to watch will be if any breakthrough is made in the talks. It’s very doubtful that enough progress can be made in time for the next EU summit that’s scheduled for Thursday and Friday, so another Brexit extension that is followed by an early election still appear inevitable. Even if Boris can agree a deal, in case it’s shot down by Parliament, that would also make an election virtually certain.

Turning tide?

Where does all this leave the pound? Admittedly, the near-term outlook looks favorable, as most potential outcomes are sterling positive. A deal would likely see the latest relief rally resume, even if the prospect of it ultimately passing through Parliament is questionable.

If no deal is reached, that may weigh on the pound a little initially. That said, the focus would quickly turn to a General Election where Johnson either gains a comfortable majority, strengthening his negotiating hand and making it easier for him to push any deal through Parliament, or a Labour-led coalition gains power under the promise of a new referendum.

GBPUSD

Technically, advances in sterling/dollar could stall near the intersection of the 1.2710 zone and the 200-day simple moving average (SMA). If the bulls overcome that area, attention would turn to 1.2865.

On the downside, if the latest retreat continues, the first obstacle may be the 1.2380 territory, where a negative break could open the way for the 1.2200 handle.

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