Last week, Boris Johnson submitted to the EU ‘fair and reasonable’ Brexit proposals aimed at replacing the contentious Irish backstop. Parliament appears to be more positive about the changes, though the EU has said more work is needed. Intensive negotiations are expected over the course of this week, and a deal could be put before parliament to show the EU that there is agreement for something. The aim is to reach an agreement ahead of the EU Summit from 17th October. Meanwhile, Parliament will be prorogued tomorrow, presumably without legal challenge this time, ahead of the Queen’s Speech on 14th October.
Business confidence has continued to fall this year which was evident in last weeks PMI surveys. The composite PMI, fell to 49.3 which was the weakest level since July 2016. The survey suggests a slight contraction in third-quarter GDP. We expect a 0.1% monthly fall in this week’s August GDP, but that follows a solid start to the quarter. Some extra impetus for the third-quarter may come from stockpiling ahead of the 31 October Brexit deadline. Despite the likely return to positive growth, the ramifications of weakening business confidence will be closely monitored going forward.
GBPEUR – 1.1217
GBPUSD – 1.2313
In the Eurozone, the PMI survey third-quarter growth will be only slightly positive. Activity has been weakening through the quarter which does not bode well for the final quarter. This week’s August industrial production numbers from the ‘big 4’ economies (Germany, France, Italy and Spain) will provide further detail. Eurozone September headline CPI also weakened to 0.9%. This appears to vindicate the ECB’s decision to cut its deposit rate to -0.5% and to restart monthly net asset purchases. These purchases are €20bn in November without an explicit end date (the programme will continue until the inflation goal is reached). The ECB will release the minutes of the contentious September meeting, where a number of members were opposed either to the need for further measures or their timing.
EURUSD – 1.0978
EURGBP – 0.8915
Concerns continue to increase that the robust US economy may be showing signs of strain. High-level trade negotiations between the US and China resume this week before further tariff rises are due. The September ISM manufacturing survey dropped to 47.8, the lowest since the global financial crisis. In addition, the sharp decline in the non-manufacturing survey to 52.6 from 56.4 suggested that services are falling alongside manufacturing. However, nonfarm payrolls were a reasonably positive 136,000, with the previous months revised higher. The trend is still consistent with slowing jobs growth. The unemployment rate fell to a 50-year low of 3.5%, but wage growth also declined to 2.9% from 3.2%.
Following rate cuts at the July and September meetings, the FOMC minutes will give more details on discussions at the September meeting. From that, the ‘dot plot’ showed a range of policymakers’ future rate intentions with the median suggesting no further changes this year. There are an array of Fed speakers this week, including Chairman Powell. Beyond this, we will see CPI inflation and the University of Michigan consumer sentiment index. Expectations are for core CPI to be steady at 2.4% and headline CPI to edge up to 1.8%. With consumer sentiment, the trend seems to be a slow drift lower, with markets expecting a fall to 92.0 in October.
GBPUSD – 1.2313
EURUSD – 1.0978
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*Interbank rates correct as at 7 am on the date of publishing.