Fundamental Analysis: Two-Month Lows for the Pound

Fundamental Analysis: Two-Month Lows for the Pound

The pound sterling posted significant losses in the early afternoon GMT today against most major currencies. Sterling’s higher volatility with an overall weakening today comes mainly in the context of fresh reports of attempts to unseat Theresa May and a lack of progress in cross-party talks. The strength of the dollar has also played a role.

GBPUSD at about $1.2957 is the lowest since mid-February. The pound is also close to fortnight lows against the yen at ¥145.04. Meanwhile euro-pound has been somewhat unstable today, but without much overall direction, trading currently at 86.5 pence, slightly above where it started in the Asian session.

Return of instability set to affect sterling

Various British news outlets reported this afternoon GMT on a possible change to the 1922 Committee’s rules. The Conservatives’ group of backbenchers is meeting on Thursday to discuss allowing a second vote of no confidence in the Prime Minister. This raises the prospect of more political instability in the UK, which has hurt sentiment on the pound.

There has been no breakthrough in talks between the government and the opposing Labour Party. Discussion continues today, but comments from backbenchers on both sides make it difficult for most traders to imagine a meaningful consensus being reached soon. Rumors are also circulating that the government might present its Withdrawal Agreement again to Parliament next week.

Despite politics, shares and data are positive

Since the latest postponement of Brexit two weeks ago to October 31, the pound has been much less volatile. Overall, though, continuing uncertainty is a strong negative factor for the pound. Some limited support has come from shares, however. The FTSE 100 reached fresh 2019 tops today over 7,515 pence, the highest since late September 2018.

In light of political news, the recent string of unusually positive economic data hasn’t done much for the pound either. The numbers for retail sales on Maundy Thursday were exceptionally good, with the annual figure beating expectations by over 2%. Annual inflation is close to the Bank of England’s target of 2%. Last Tuesday’s job data also showed that unemployment remains close to 40-year lows.

Brexit everywhere this week

Political news is the most important factor for the pound this week in the absence of important economic data. Traders will be studying comments by senior Conservatives, events in Parliament, news and rumors from Con-Lab negotiations, and perhaps polling for the European elections in which the UK will now need to participate.

The only data of note from the UK this week is business optimism on Thursday and mortgage approvals on Friday. Neither of these releases is likely to have much effect on the pound given markets’ focus on politics. However, traders must watch technical developments this week. Crucial levels like $1.30 and ¥145 are very likely to challenge the pound’s movement in either direction.

More weakening in store for the pound?

Although clarity on the expected outcome of Brexit is very unlikely this week, a breakthrough in Con-Lab talks is not impossible. Traders might prepare for a return to the pound’s high volatility and focus more on technical analysis. Nevertheless, the pound is probably set to continue making some small overall losses this week.

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