Pound rallies, how much ‘oomph’ is needed for a Brexit deal in July?

The pound rallied on Tuesday as GBP investors welcomed Boris Johnson’s upbeat Brexit comments.
 
Sterling appears to have run out of momentum this morning however, with GBP/EUR subdued at €1.1138 and GBP/USD flat at $1.2567. GBP/CAD is rangebound at C$1.7007, while GBP/AUD and GBP/NZD are holding steady at AU$1.8225 and NZ$1.9466 respectively.
 
Looking ahead, a slowing of UK inflation could weigh on GBP exchange rates today as it puts more pressure on the Bank of England (BoE) to ease monetary policy even further.
 

What’s been happening?

 
The pound rallied through yesterday’s session as Boris Johnson struck an upbeat tone on the chances of the UK and EU reaching a Brexit deal.
 
The PM went so far as to suggest that with a ‘bit of oomph’ it might even be possible for a Brexit deal to be reached in July.
 
This helped to offset a mixed jobs report from the UK, which revealed 600,000 jobs were lost in the three months to May and that wage growth slowed to a crawl over the same period.
 
Also rising on Tuesday was the US dollar, with USD investors cheering a record 17.7% rebound in US retail sales growth in May.
 
However, these gains were capped in the wake of Jerome Powell’s testimony in front of Congress, as the Federal Reserve Chair warned the timeline for a US economic recovery remains uncertain.
 
This surge in the US dollar limited demand for the euro yesterday, leaving the single currency on the back foot in spite of positive economic sentiment surveys from Germany and the wider Eurozone in May.
 

What’s coming up?

 
Turning to today’s session the spotlight is likely to be on the UK’s consumer price index.
 
Data published earlier this morning revealed UK inflation slowed from 0.8% to 0.5% in May, striking its lowest levels since 2016 as the coronavirus crisis kept down prices of energy and fuel.
 
This drop in inflation may weigh on the pound today as the fall is likely to put more pressure on the Bank of England to support the UK economy, pushing it to explore unconventional monetary policy such as negative interest rates.
 
Meanwhile, the Eurozone is also set to publish its latest CPI figures this morning, with the euro potentially remaining on the defensive if today’s figures confirm the bloc suffered some deflation last month.
 
In the US, Powell’s testimony continues, but with the Fed chair having already covered his main points any fresh impetus in the US dollar is likely to come from market sentiment.