GBP – Brexit and BoE

In his first speech as Prime Minister, Boris Johnson said that the UK will leave the EU on 31 October, “no ifs or buts”. PM Johnson called for the abolition of the Irish backstop to get Brexit through, while the EU insists the current Brexit deal is the only one available.  The UK government has committed to ramping up its ‘no deal’ preparations. Parliament is now into its summer recess, while this Thursday’s Brecon and Radnorshire by-election is likely to see the Conservative’s working majority fall to just one.

The Bank of England (BoE) is expected to vote unanimously to keep interest rates at 0.75% on Thursday. There is likely to be further discussion around gradually increasing rates.  Until there is further clarity on Brexit, no increase to rates is likely. Two of the most hawkish BoE members, indicated their preference to keep rates unchanged for now. There is a press conference after the policy announcement at 12.30.

The BoE will also release their new economic forecasts in the new Inflation Report.  There is a tricky line to tread between the government policy for an EU deal and an increase in the risk of no deal.  Markets now expect a 0.25% reduction in interest rates over the next year.  GfK consumer confidence, manufacturing and construction PMI’s are all expected to show small increases, though they remain low historically.

GBPEUR – 1.1112

GBPUSD – 1.2365

EUR – Data continues to weaken

The European Central Bank has signalled policy easing after the summer, as the Eurozone PMI and German IFO business surveys showed further weakness.  With the ECB shifting its bias towards more policy stimulus, but holding off from taking immediate action, further weak data from the Eurozone will be closely watched.

This week we will get the first indications for second quarter GDP and July inflation. Expectations are for GDP growth to slow to 0.2% from 0.4%.  There are also preliminary figures with France and Spain expected to show robust growth and Italy expected to be flat. We expect Eurozone ‘flash’ CPI inflation to show no change for either the headline (1.2%) or core (1.1%) measures.  This remains, well below the ECB’s aim of close to 2%, and will give the Central Bank further cause to take action.

EURUSD – 1.1128

EURGBP – 0.8999

USD – 0.25% cut expected

Markets expect US Federal Reserve to cut interest rates for the first time in more than a decade.  The case for a rate cut does not seem that convincing, with the labour market remaining strong. The Fed’s concerns are around downside risks, including from weakening global demand. The stronger than expected second quarter GDP growth at 2.1% is likely to limit the cut to 0.25%.  Fed Chair Powell will hold a press conference after the meeting.

We expect US labour market figures to remain robust. Nonfarm payrolls are likely to increase by close to 200,000 with a fall in the unemployment rate to 3.6%.  Earnings growth meanwhile should edge up to 3.2%. We expect the Fed’s preferred inflation measure, the personal consumer expenditure deflator, to rise to 1.6% from 1.5%. Meanwhile, trade talks with China will resume mid-week with developments closely watched by markets.

GBPUSD – 1.2365

EURUSD – 1.1128

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*Interbank rates correct as at 7 am on the date of publishing