The British pound sold off sharply yesterday and continues to sell off this morning. The pound has been weak following rumors that Theresa May was planning on resigning. While Sky News yesterday said that May's office had denied the rumors, this morning former Conservative Party Chairman Shapps claimed that talk of 30 Conservative MPs wanting May out was "about right". The BBC covered the news story earlier this morning. Given May's weak grasp on power, expectations for a 'Brexit deal' continue to fall, raising the risk of 'hard Brexit'.
GBP/USD is currently below 1.3080. EUR/GBP continues to rise, despite the euro-related risks we covered earlier this week. EUR/GBP is currently trading above 0.8930. The pound has been mostly flat against the Australian dollar and the Canadian dollar this morning, with GBP/AUD around 1.6830 and GBP/CAD around 1.6460.
This week's economic releases includes a range of survey data. On Monday, Markit manufacturing PMIs were lower than expectations (55.9 vs. 56.4 expected). Tuesday's Markit/CIPS construction PMIs came in far below expectations (48.1 vs. 51 expected). On Thursday, Markit/CIPS services PMI data beat expectations (53.6 vs 53.2 expected).
From its recent peak in the third week of September, the pound has fallen on most days. The currency has been falling due to a range of disappointments including weaker-than-expected economic data (GDP growth and current account deficits) and falling Bank of England interest rate hike odds. Having been in overbought conditions for some time, we now believe the pound has re-entered normal trading conditions. This is based on various technical indicators when looking at a daily chart.
After maintaining a bullish outlook on the pound since early September (following interest rate hike indications from the Bank of England), we are now downgrading the pound to bearish. The currency has sold off in the last two weeks of September, and the first week of October, thanks to poor economic data, perceived political infighting within the Conservative party and falling rate hike odds. After looking overbought on a range of technical indicators, the pound is now back to trading within normal conditions.