- Chaotic UK politics, weak economic data, a poor technical picture and a lack of progress on Brexit have put the Pound under severe downward pressure.
- Moreover, the chances are negligible of a breakthrough in the fifth round of Brexit talks that begins in Brussels Monday.
GBP/USD is extending its downward trend on a toxic combination of factors that could well send it lower still. First, UK Prime Minister Theresa May put in a disastrous performance at the annual conference of her Conservative Party this week, putting her future as PM in doubt.
A prankster managed to enter the conference hall and hand her a P45, the form given to workers in the UKwhen they lose their jobs. “Boris asked me to give you this,” he said, in a reference to Foreign Secretary Boris Johnson, who is widely believed to be mounting a leadership challenge. She coughed throughout the speech and the set behind her began to fall apart, with the letter “F” falling off first, cueing some rather crude jokes.
May’s position is now so weak that bookmakers are offering odds on who will replace her. Paddy Power, for example, has Johnson at 5/1, followed by Brexit Secretary David Davis at 7/1 and Chancellor Philip Hammond at 8/1. Ladbrokes is quoting 2/1 she will be replaced this year and 7/4 she will lose her job next year.
Then there’s the UK data. The purchasing managers’ indexes for both the UK manufacturing sector and the UK construction sector came in lower than expected this week, with the latter pointing to a contraction in activity. A better than predicted figure for UK services did little to revive spirits.
On Brexit, the two sides seem further apart than ever, increasing the chances that the UK will leave the EU without an agreement. The idea of replacing May in the middle of the negotiations is widely viewed with horror and her replacement by the hard-line Johnson could make a deal harder rather than easier to reach.
As for the technical picture, GBP/USD has already dropped through several key support levels although, as the chart below shows, the relative strength index is currently below 30, suggesting the pair has now been oversold. IG Client Sentiment data are currently sending out a bearish warning too.
Chart: GBP/USD One-Hour Timeframe (September 14 – October 5, 2017)
The one saving grace for the Pound is that the Bank of England remains on course to increase UK interest rates to combat rising inflation, with November 2 currently the favored date. The market is putting a probability of around 70% on that happening but traders need to listen carefully to comments by UK rate-setters for any sign of a change of heart because of the weak Pound, poor data and political turmoil.
Upcoming UK/EU Event Risk (October 6, 2017, All Times GMT)
--- Written by Martin Essex, Analyst and Editor
To contact Martin, email him at firstname.lastname@example.org
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