GBP/USD drops below 1.31, is the sell-off overdone?

GBP/USD fell to 1.3087 in Asia; the lowest level since September 7 on fears that UK PM May would be forced out of her party.

The currency pair closed below 50-day moving average yesterday and extended losses in the Asian session after reports hit the wires that up to 30 of May's lawmakers support telling her to go. Meanwhile, Home Secretary Rudd wrote in Telegraph that May should stay as the PM, however his comments did little to help stabilize the Pound.

Trades below 61.8% Fib retracement Aug-Sept rally

At press time, the currency pair is trading well below 1.3111, which is the 61.8% Fibonacci retracement level of the rally from the Aug 24 low to Sep 20 high.

Is the sell-off overdone?

The yield differential, i.e. the spread between the US 10-year bond yield and UK 10-year bond yield holds well below the recent high of 100 basis points. The spread remained largely unchanged at 96 basis points during the drop in Cable from 1.3250 to 1.3087, which indicates the sell-off could be overdone.

GBP/USD Technical Levels

FXStreet Chief Analyst Valeria Bednarik writes, " From a technical point of view, the pair is biased lower, holding near the mentioned low at the end of the day, and with the 4 hours chart showing that the 20 SMA accelerates south below the 200 EMA, both well above the current level. In the same chart, the Momentum indicator turned flat within negative territory, but the RSI maintains its bearish slope, currently around 20. A downward acceleration below the mentioned daily low, will open doors for an extension towards the 1.3000 critical threshold for this Friday."