Hopes of a Brexit deal before the end of the year rose again with positive comments from Brexit secretary Dominic Raab. Sterling rose through the week as a result. There were reports of a potential agreement on UK financial services’ access to the EU and on the Irish border issue, though there is nothing official yet.
The other two major events last week passed without a significant impact on the markets. The budget on Monday saw Mr Hammond loosen the purse strings somewhat. In claiming that we are at the end of austerity, the Chancellor increased spending in a number of areas suggesting fiscal policy will be less of a drag on growth. As expected the Monetary Policy Committee left interest rates unchanged. The Monetary Policy Committee did, however, note concerns about inflation and said that interest rates may rise more than expected if we see a smooth Brexit.
Beyond any further Brexit developments, we will see the third quarter GDP estimate. The new monthly data suggest that we will see strong growth. We expect an increase of 0.6% which will be the highest for two years. This growth is likely to be driven by consumer spending, with manufacturing numbers last week particularly weak. The services number today will provide further insight into October activity in an uncertain Brexit environment.
GBPEUR – 1.1414
GBPUSD – 1.3009
Following the more positive reports around Brexit negotiations in the British media, we will be watching for a reaction from Europe this week. We start the week with an update from Michel Barnier. Brexit hopes may be dashed by the EU’s chief negotiator, who is due to report on progress today. Any suggestion or rebuttal of progress will no doubt move the market further.
Away from Brexit concerns, there remain concerns about growth in the Eurozone which slowed to 0.2% in the third quarter. We have a number of further indicators of the European economy this week, with German factory orders and industrial production giving a further gauge of growth in the largest Eurozone economy. We also see the Europe wide numbers on services and retail sales.
Following the political turmoil surrounding Angela Merkel with the latest state elections, she has agreed not to run again for the party leadership in December. She will, however, remain Chancellor. This leaves the path open for a leadership battle to lead the party and could also lead to clashes between the new party leader and the Chancellor.
EURUSD – 1.1397
EURGBP – 0.8761
We have seen calmer markets in the run-up to the mid-term elections, with hopes of a trade deal between the US and China. The midterm elections will give a good gauge of Mr Trump’s presidency so far. The Republicans are expected to lose control of the lower house to the Democrats, retaining the Senate. If this happens, it will make it difficult for the President to make further changes to domestic policy. Further tax cuts would be less likely, though it would be unlikely to relieve international trade tensions.
Expansionary fiscal policy from the President has been one of the factors behind increasing interest rates. A block on further fiscal boosts may adjust the Fed’s thinking of the fed around further rate hikes. The Federal reserve board meet this week to decide on interest rates, though there is no expectation for a rate hike this month. We still expect the Fed to raise rates again in December and to signal further increases for next year.
After a very strong US employment report, we have a rather quiet week on the data front this week. Friday’s figures saw non-farm payrolls growing by 250,000 in October, with annual wage growth rising to 3.1%. We see the non-manufacturing PMI start the week, with expectations for a fall from last months very robust figure.
GBPUSD – 1.3009
EURUSD – 1.1397
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*Interbank rates correct as at 7 am on the date of publishing