The pound enjoyed a small rebound yesterday but is flat this morning. Today is a significant day for the pound given the ongoing European Council Meeting. The hope that Brexit negotiations will progress to trade talks are low, given limited progress in areas like the financial settlement and the rights of EU citizens following Brexit. Reuters is reporting that Theresa May is close to reaching a deal on EU citizens following Brexit. So far, the EU has refused to discuss the possibility of a trade deal without agreeing upon a financial settlement. May has offered €20b, while Brussels has calculated a financial settlement of €60b. The British Prime Minister is under increasing pressure from pro-Brexit elements in her party to walk away from a Brexit deal entirely (bringing about so-called 'hard Brexit').
GBP/USD is currently just below 1.320. EUR/GBP has been up three days in a row and is currently trading above 0.8940. The pound is down against both the Australian dollar and the Canadian dollar, with GBP/AUD around 1.680 and GBP/CAD above 1.650.
This week is significant for the British pound – it includes a lot of economic data and the outcome of the European Council Meeting (which will include a report of the ongoing Brexit negotiations). On Tuesday, producer prices beat expectations (8.4% vs. 8.2%) while consumer price index figures met expectations (2.7% year-over-year core CPI and 3% year-over-year CPI). Given the BOE’s recent indication that a rate hike is likely, markets will be watching for high inflation rates to continue. Wednesday's jobless claims (1.7k vs 1k expected) and unemployment rate figures (4.3% vs. 4.3% expected) mostly met expectations, but failed to move the pound. Today, 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 rebounding on October 18 and 19, we are upgrading the pound to neutral in the short-term. Earlier, the currency sold off after Carney failed to confirm a rate hike was coming next month (instead saying one was coming in the "coming months"). While we had warned that the currency was overbought and was looking due for a rebound, the pound has since 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.