The pound fell yesterday on Brexit-related headlines, and is trading mixed this morning. Yesterday, a Bloomberg story reported that Brexit negotiations are heading for a “catastrophic breakdown unless the European Union signals this week that it will allow talks to move on to trade” according to “a person familiar with the U.K. government's position”. The pound initially fell sharply on the news, although it recovered some of its lost ground later in the day. Today is a critical day for the pound, as inflation figures set to be released in a few hours will help set rate hike expectations. If inflation numbers are weak, the pound may fall further on falling rate hike expectations. We covered our broader views on the pound in a recent thought piece.
GBP/USD is currently just below 1.3250. EUR/GBP is down this morning (after being up yesterday) and is currently trading below 0.8880. The pound is up against both the Australian dollar and the Canadian dollar, with GBP/AUD around 1.690 and GBP/CAD above 1.6620.
This week is significant for the British pound – there is a lot of economic data on the schedule and the outcome of the European Council Meeting (which will include a report of the ongoing Brexit negotiations). On Tuesday, we’ll get producer prices and consumer price index figures. Given the BOE’s recent indication that a rate hike is likely, markets will be watching for high inflation rates to continue. On Wednesday, we’ll see jobless claims, the unemployment rate and hearings from the inflation report hearings. On Thursday, we’ll get retail sales figures. The European Council Meeting, which is scheduled for October 19 and 20 (Thursday and Friday), will contain a review of the ongoing Brexit negotiations. Given the sensitivity of the pound to Brexit progress, any update from the meeting will be watched closely.
After running out of momentum in mid October, we are downgrading the pound to neutral. The currency continues to be deeply influenced by Brexit-related headlines. Earlier, we warned that the currency was overbought and was due for a rebound. Now, the currency has re-entered normal trading conditions.
After strengthening in the second week of October, we are now neutral on the British pound. The pound rebounded after senior Conservative Party leaders publicly backed Theresa May, suggesting that rumors of May's resignation were unfounded. The pound has been particularly strong against the US dollar and the euro in recent times. After looking overbought on a range of technical indicators, the pound is now back to trading within normal conditions.