- Last week we said it's hard to be a pound bull, and this remains true today
- In the short-term, there are many catalysts that can extend today's relief rally
- Markets will be watching May's speech today and indications from Barnier noting "sufficient progress"
Last week, we outlined many reasons to bearish on the pound, while noting the relatively small number of reasons to be bullish on the currency. While our longer term outlook has not changed, the pound is enjoying a relief rally today after falling into deeply oversold territory. As we wrote earlier: “While the pound may be due for a small rebound in the short-term, the forecast remains cloudy in the longer term.”
Politics continues to dominate pound trading
Over the weekend, The Sunday Times reported that Tory sources claim that Theresa May is planning a reshuffle after the European Council meeting on October 19-20. The upcoming meeting is particularly important for the pound, as leaders from the EU will decide whether or not to progress to trade talks. If trade talks are postponed, the pound is likely to further weaken on increasing uncertainty.
Earlier, doubts were growing regarding May’s staying power following Boris Johnson’s interview in The Sun. Rumors regarding May’s ouster increased as former Conservative Party chairman Shapps led efforts to gather signatures in order to trigger a Conservative Party election last Thursday. This weekend’s news suggests that May has survived the potential challenge, and will move to consolidate power following the upcoming European Council meeting.
Potential factors that can extend today’s relief rally
Looking at recent trading in GBP/USD, the pound made its most recent bottom last Thursday above 1.3060. The currency has since moved up following this weekend’s news, and is currently in a strengthening pattern. This week has plenty of economic data releases and speeches that can propel the currency higher, and GBP/USD should have no trouble surpassing 1.32/1.33 on good news. Later today at 14:30 GMT, Theresa May is set to update parliament regarding the ongoing Brexit talks. While the speech is unlikely to cover new Brexit-related material, it may hint at upcoming political changes in her cabinet.
Today is also the first day of the fifth round of Brexit talks covering citizenship rights, financial settlements and the Irish border. Michael Barnier’s upcoming speech this week (not yet scheduled), will also be watched closely. A green light from Barnier may suggest that leaders at the upcoming European Council meeting will progress to trade talks in the near future. This could cause the pound to continue rallying.
Lastly a large number of economic data releases are scheduled for tomorrow, including retail sales, industrial output, construction output, manufacturing output and the trade balance. Unfortunately, recent retail sales data has been fairly volatile and survey data covering the industrial and construction industries has been pretty poor. While economic data is unlikely to grow enthusiasm for the pound, any figures that beat expectations can help extend the current rally. A recent overview of GBP/USD is shown below for reference.
How much higher can the pound go?