Pound Sterling's Worst Day vs. Dollar Since the Election + Euro Shakes off Catalan Blues

• Quotes:
• Pound-to-Euro exchange rate today: 1 GBP = 1.1297 EUR
• Pound-to-Dollar exchange rate today: 1 GBP = 1.3266 USD

The British Pound is seen selling off in afternoon trade in London with no clear culprit being identified as being behind the move. 

The Pound suffered sustained selling pressures against its main competitors at the start of the new week and month; the move clearly stumping commentators and analysts owing to the lack of clear drivers to blame.

The declines were seen in early afternoon and were therefore not attributable to the morning’s release of manufacturing PMI data.

There appears little consensus amongst the analysts we follow as to why the British Pound has come under pressure but market positioning ahead of busy week of data releases and political intrigue is the most likely driver.

“GBP is weak, down 0.7% vs. the USD and underperforming all of the G10 currencies, testing fresh multi-week lows as market participants consider political risks into PM May’s speech on Wednesday,” says Eric Theoret, an analyst with Scotiabank.

May will deliver the closing speech to the Conservative Party conference on Wednesday where she might give further details on the Government's evolving stance to Brexit. 

One interesting headline we have picked up on is a report that May is leaning increasingly towards Chancellor Philip Hammond's vision of Brexit. Hammond is known to favour a soft-style Brexit and we find this a notable positive for the Pound which is expected to benefit from the certainty that such an eventuality presents.

Officials who spoke to Politico on condition of anonymity believe May is “leaning” toward a lasting agreement with Brussels to maintain equivalent rules and regulations with the EU, potentially for decades after Brexit, in a move which would be far closer to Hammond’s position than Johnson’s.

The first data release of the month meanwhile came in on the strong side, even if expectations were missed.

The U.K.’s manufacturing PMI delivered a modest disappointment -55.9 vs. 56.2 expected by markets and softer than the 56.7 reported last month, but the data confirms a continued solid rate of expansion for the sector and points to a decent outturn in third-quarter GDP data.

Indeed, it does little to alter the view that the Bank of England will raise interest rates in November, recall it is expectations for this rate rise that propelled Sterling higher through September.

“Bank of England rate expectations remain firm, with OIS pricing an 83% chance of a November hike. Last week’s comments from Governor Carney were hawkish as he guided to a limited, gradual tightening path,” says Theoret.

The reason for Sterling's underperformance could well lie with the Dollar, however.

"The Dollar was lifted last week by hawkish comments from Janet Yellen and the long-awaited reveal of Trump’s tax plan, before receiving the extra boost of the fastest month-on-month ISM manufacturing PMI growth in 13 years this Monday. As for the Euro, though it has a Spanish headache, it also saw confirmation of a 6 and a half year high region-wide manufacturing reading this morning," says Connor Campbell, an analyst with Spreadex in London.

"After its super-charged September ended on a sour note, the Pound’s October has started in the worst way possible, with the currency posting its largest decline against the Dollar since the day after June’s general election," adds Campbell.

Concerning the near-term outlook, Theoret has studied the charts and reckons Sterling’s outlook has deteriorated, particularly against the US Dollar.

“GBP is under pressure, flirting with 1.33 and testing levels last seen in mid-September. Momentum signals have shifted aggressively and are threatening a push into bearish territory,” says Theoret observing that DMI’s are converging in a manner that is suggestive of a shift in the balance of risk.

“We note the absence of support ahead of 1.3220—the level roughly corresponding to the mid-point of the August-September rally,” the analyst adds.

Euro Brushes Aside Catalonia Concerns

The Pound-to-Euro exchange rate started the day in the green thanks to jitters concerning the destabilising events witnessed in Spain’s Catalonia region over the weekend.

The jitters were soon cast aside with most market analysts seeing little implications for the European Union and Eurozone.

“Another week, a fresh wave of politics driving currency markets. Noise around Catalan independence is likely to keep the EUR on the back foot and risks fuelling a deeper technical correction. But the fundamental fallout may be limited,” says Viraj Patel, an analyst with ING Bank N.V. in London.

Get up to 5% more foreign exchange by using a specialist provider by getting closer to the real market rate and avoid the gaping spreads charged by your bank for international payments. Learn more here.