After weakening sharply in the first week of October, the pound is rebounding this morning against most major currencies including the dollar and the euro. Looking at news over the weekend, senior Conservative Party figures have publicly given their support to Theresa May. This has helped subdue concerns that a power struggle within the party may result in May's ouster and derail Brexit negotiations. Earlier, we warned that the pound was looking oversold. The currency remains oversold, particularly against the dollar, and may continue strengthening from here in the short-term.
GBP/USD is currently trading above 1.31, having made its most recent bottom above 1.30. EUR/GBP is now falling after rising for most of last week. EUR/GBP is currently trading below 0.8950. The pound has strengthened against the Australian dollar and the Canadian dollar this morning, with GBP/AUD around 1.6880 and GBP/CAD around 1.6440.
After various survey data points last week, this week will include a fair amount of macroeconomic data for the UK. On Monday, we’ll see year-over-year retail sales, which have been fairly volatile this year. Tuesday is a big day and includes manufacturing and industrial production figures, trade balance data and an estimate for GDP growth in the trailing three months. Finally on Wednesday, we’ll get house price data. Last week's survey data suggested good services growth, while construction and manufacturing PMIs came in below expectations.
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.