Developments in politics key

GBP – Brexit negotiations resume

Last week was a busy week for economic data in the UK, though the data had little bearing on the fortunes of sterling.  Unemployment fell to a 43-year low of 4%, though pay growth remained modest.  Inflation moved slightly higher for the year, whilst the ‘core’ rate remained steady at 1.9%.  Retail sales rose by a surprising amount for July. But with the market focus on Turkey and whether the crisis would spread, the US dollar has appreciated against most currencies with sterling hitting a fourteen month low last week.  

Sterling also touched an eleven-month low against the euro as Brexit remains a key issue for the UK.  Brexit negotiations resumed last Thursday with reports suggesting that the focus remains on the thorny Irish border issue.  Discussions will continue this week with key autumn deadlines approaching.  Brexit secretary Dominic Raab is due to meet EU negotiator Michel Barnier again tomorrow in what is likely to be the major focus for the markets this week.  There is little further data this week with the highlight being CBI industrial and retail surveys.  

GBPEUR – 1.1156

GBPUSD – 1.2738

EUR – Turkish concerns remain

European economic growth has disappointed this year, though there are some signs that the situation is improving. Eurozone second quarter GDP growth was revised up last week to 0.4% from 0.3%. The Eurozone purchasing managers indices (PMI) were mixed with the manufacturing index increasing but the services falling.  Overall, the composite indicator was lower than June. In a better portent of future data, the August German ZEW survey was showed a rise in both current conditions and expectations. 

The euro has struggled against the dollar over the last week as concerns remain over Turkey and a potential spreading of the crisis.  Though the Lira stabilised following actions taking by the Turkish government to make it expensive to sell the currency, the concerns over exposure to Turkish banks remains an issue.  

This week we expect the Eurozone PMI to have also posted rises in August. The expected gains would still leave them below their levels of last year. However, the ECB considers last year’s growth rate as unsustainably high, so some slowing in growth fits with its plans to reduce QE purchases this year and raise interest rates next. 

EURUSD – 1.1418

EURGBP – 0.8964

USD – Robust economic activity

US data continues to point to robust economic activity. Last week, July retail sales were surprisingly positive.  In particular, in the past week, July retail sales surprised on the upside. This robust economic activity is why the US Federal Reserve is still likely to raise interest rates, for the third time this year, in September.  Fed Chair Powell will speak at the Jackson Hole economic policy symposium and may provide further insight into the future path of rates and recent volatility. Ahead of that, the Fed will release the minutes of the August policy meeting. 

One recent exception to positive economic sentiment has been housing data. Housing data can be volatile, but the slowdown may be an early sign of the impact from higher interest rates. This gives more significance to this week’s new and existing home sales. Both are expected to post a rise. Otherwise, it’s a quiet week for US data with only US durable goods orders of note. Also of interest this week is the resumption of trade talks between the US and China. 

GBPUSD – 1.2738

EURUSD – 1.1418

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*Interbank rates correct as at 8am on the date of publishing