02.09.201910:53 Forex Analysis & Reviews: PMI data reinforces sterling selling, EUR/GBP still a fade on rallies

The sterling was resilient on Friday with EUR/GBP retreating to the 0.9025 area, although the wider dollar's strength pushed GBP/USD below 1.2200.

There was significant weakness in early Europe on Monday with EUR/GBP strengthening to 0.9065 while GBP/USD slid to lows just below 1.2100.

Political developments will inevitably deal a blow to GBP value due to crucial developments in the House of Commons when it returns from recess on Tuesday.

Opposition party members will intensify their efforts to avoid the scenario of a no-deal Brexit at the end of October. The most likely mechanisms for MPs are to attempt to pass the legislation which would force the government to ask for a further Brexit extension if there no deal is finalized by October 31st. There is also the possibility that there will be a no-confidence vote in the government.

Prime Minister Johnson has stepped up pressure on potential rebel Conservative MPs. He stated that they would be thrown out of the party and de-selected for the next General Election if they vote against the government.

A high degree of uncertainty is hanging over the outcome given serious divisions within parliament.

This uncertainty will be a crucial factor as EU leaders are unlikely to review their position and offer concessions on the controversial Northern Ireland backstop if there is no evidence that any revised deal will be passed by the UK parliament.

The UK PMI manufacturing index tumbled to 47.4 for August from 48.0 the previous month and the weakest reading for 85 month. New orders declined sharply to a 7-year low and business confidence also worsened to record lows as political uncertainty sapped sentiment.

The weak data will reinforce fears over the near-term outlook and medium-term damage to the economy, but the euro is still poorly placed to take advantage of the UK's vulnerability with EUR/USD sliding below 1.1000.

Latest CFTC data indicated only a small reduction in short, non-commercial sterling positions with the number of contracts still close to 2-year highs. The data still indicates scope for position liquidation and sharp sterling's gains if there is a shift in sentiment.

A major problem for the sterling bulls is the lack of an obvious trigger for improving sentiment. Thus, sellers will be looking to target 1.2000 in GBP/USD before a potentially sharp rebound.