Yesterday was a pretty wild day for the British pound. After strengthening in the morning, the pound fell sharply following comments from Davis and Barnier suggesting limited progress in the Brexit talks. The two sides have been unable to agree on Britain's exit payment. Later in the day, the currency jumped on news that the EU was considering offering the UK a 2-year extension. According to German newspaper Handelsblatt, the offer is tied to the UK remaining as part of the EU, but giving up its voting rights. This morning, the pound continues to broadly strengthen against most its major peers.
GBP/USD is currently just above 1.33, having strengthened for the last five consecutive days. EUR/GBP is down this morning (after falling yesterday) and is currently trading below 0.8880. The pound is flat against both the Australian dollar and the Canadian dollar, with GBP/AUD around 1.670 and GBP/CAD around 1.6570.
After various survey data points last week, this week will include a fair amount of macroeconomic data for the UK. Retail sales came in quite strong (1.9%) vs. previous figures (1.3%). Tuesday's manufacturing (2.8% vs. 1.9% expected) and industrial production figures (1.6% vs. 0.8% expected) beat expectations. Trade balance data came in very weak (-14.2b vs. -11.2b expected). Today's house price data beat expectations (6 vs 4 expected). Last week's survey data suggested good services growth, while construction and manufacturing PMIs came in below expectations.
After rebounding with strength on October 9, we are upgrading the pound to neutral. Earlier, we warned that the currency was overbought - and this remains the case for now. Earlier, pound sterling was weakening 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.
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.