Brexit negotiations are set to resume now that the Conservative Party conference has closed. Prime Minister May signaled at the end of the conference that the UK will not seek a Brexit deal ‘at any cost’. However, the absence of any further mention of her ‘Chequers’ deal during her speech has raised hopes that a shift in position may be due. Discussions over the Irish backstop continue. Dominic Raab and Michel Barnier are due to meet with expectations that an updated proposal for the Irish border will be put forward.
Last week saw a mixed set of data from the UK. Manufacturing PMI increased slightly to 53.8, whilst services PMI dropped back a touch to 53.9 – still better than many expected. Ahead of the 18th October EU Summit, Mr. Barnier is expected to present the draft political declaration on the future relationship with the UK to representatives of member states. This represents the last major opportunity for the UK to alter the communication ahead of the summit.
With the coming week’s attention likely to centre on Brexit developments, the data is once again likely to take a back seat. We expect the latest round of UK monthly GDP data to show resilience in the face of ongoing Brexit uncertainty. GDP growth of 0.2% month on month would be in line with Bank of England projections of 0.5% GDP growth in the third quarter.
GBPEUR – 1.1384
GBPUSD – 1.3109
Italian fiscal concerns remain centre of attention in the Eurozone. The ongoing tensions between Italy and the European Commission are likely to remain a key focus in the coming week.
Markets have become increasingly concerned about the implications for public finances from the coalition government’s election pledges. They include a universal income for citizens and pension reforms. The government announced a fiscal deficit target of 2.4% of GDP for next year (then 2.1% and 1.8%). These are based on optimistic economic growth projections of 1.5% per annum which is higher than forecasts of 1% per annum.
The data calendar remains limited in the Eurozone with the August industrial production report on Friday likely to provide some additional insight into the Q3 growth outlook. The minutes of the last ECB meeting will also provide some thought on whether policymakers are concerned about the deceleration in Eurozone GDP growth seen this year.
EURUSD – 1.1515
EURGBP – 0.8784
Strong US data continued last week, with non-manufacturing ISM jumping to a 21 year high at 61.6. Meanwhile, unemployment dropped to a 48-year low of 3.8%. Non-farm payrolls were weaker than expected with an additional 134,000 jobs, but this may have been hurricane affected, and upward revisions on previous months continue to show a strong picture. Earnings growth did, however, ease slightly.
Following this strong data was the agreement on a revamped North American trade deal – the US, Mexico and Canada Agreement (USMCA). Yields on US bonds have risen sharply, reaching new highs for the year. Comments from US Fed Chairman Jerome Powell added further momentum. He noted that interest rates were ‘a long way from neutral at this point’. This suggests that the Federal Reserve has some way to go before interest rates become restrictive. Mr Powell commented on the strength of the economy and said that there is no reason why it cannot continue.
The coming week’s data is more limited with the September CPI report the main release. This measure of inflation is expected to ease to 2.5%, though it will likely remain above 2% for some time.
GBPUSD – 1.3109
EURUSD – 1.1515
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*Interbank rates correct as at 7 am on the date of publishing