GBP/USD holds steady as investors weigh Brexit risks

• GBP/USD is at the mercy of the markets balancing Brexit and COVID risks to BOE.
• BoE is being priced to hike, but some think it is a rate hike too soon and a mistake. 

Sterling rose slightly on Monday but remained within recent ranges as analysts weigh up the expectations that the Bank of England will raise rates against economic data and Brexit headlines. 

British Brexit minister David Frost said on Monday that the European Union's proposals to solve the problem of trade involving Northern Ireland did not go far enough and significant gaps remained between the two sides. 

It would appear that the UK will continue to play rhetorical brinkmanship, holding off on triggering Article 16 while Frost tries to extract further concessions from European Commission Vice President Maroš Šefčovič. Sooner or later, though, Johnson will have to make a particularly difficult decision: compromise and move on, or provoke a war the UK could well lose.

BoE in focus, a hike too soon?

Meanwhile, money markets are pricing in a rate hike by the Bank of England at its meeting on 4 Nov. However, data from the UK last week was mixed which has resulted in traders dialling back rate hike expectations so soon. For instance, business activity surveys showed improvement as the economy unexpectedly regained momentum in October, but Retail Sales figures were worse than expected which has taken the shine out of the pound recently. 

A segment of the market likely believes that policymakers could be making a mistake by tightening policy too quickly. This leaves the pound vulnerable to the downside given that speculators have switched to a small net long position on the pound in the week to Oct 19, positioning data from CFTC showed.

Meanwhile, UK breakeven inflation rates continue to climb. ''This seems to be telling us that the market believes that the BoE is falling behind the curve in terms of fighting inflation, and yet most analysts would probably agree with us that a rate hike now is a mistake,'' analysts at Brown Brothers Harriman argued. 

GBP/USD technical analysis