We start the week with two of the UK’s financial heavyweights setting out policy decisions. The Chancellor of the Exchequer will likely take some comfort from a resilient UK economy and base the Budget today on the assumption of a smooth transition to a new trading relationship with the EU. We expect an upbeat budget that loosens the purse strings in an end to austerity. The improved government finances will allow the chancellor to say he is still meeting his fiscal rules. There were reports over the weekend that a no deal Brexit would lead to a retake on the Budget.
On Thursday, the Governor of the Bank of England will release the November Inflation Report. There are likely to be minimal changes to forecasts from the August report. No surprises are expected from the Bank of England decision on Thursday. Their main message that a gradual increase in policy rates will be required should the economy continue to develop in line with their forecasts.
The UK’s progress towards a Brexit deal with the EU will keep everyone’s attention this week but an immediate breakthrough still looks elusive. With the ongoing impasse, concerns around the potential impact of ‘no deal’ are becoming evident in survey data. October PMIs at the end of this week will be watched closely.
GBPEUR – 1.1265
GBPUSD – 1.2835
The European Central Bank rate decision and press conference on Thursday was uneventful. The ECB kept policy unchanged as expected. The Riksbank and Norges bank similarly kept rates unchanged. Attention will now return to the data. The eurozone PMI survey disappointed last week, with the composite falling to 52.7. This week we will see third quarter GDP growth and October inflation. Though recent sentiment surveys have been weaker, we expect growth to remain in line with the second quarter, which would give year-on-year growth of 1.8%. Inflation is likely to remain stable around 2.1%, though the core measure may pick of from below 1%.
Further turmoil continues in Germany for chancellor Merkel, with the weekend state elections in the German Bundesland Hesse. There was further ground lost by Chancellor Merkel’s party, the CDU. There were also losses by their coalition partner, the Social Democrats. The Eurosceptic AfD will have seats in the assembly for the first time after getting 12% of the vote. With the CDU’s party conference in December and concerns over the current coalition, Mrs Merkel could lose her leadership re-election bid. She has said previously she could not continue as chancellor if she lost that role.
EURUSD – 1.1394
EURGBP – 0.8877
The focus this week will again shift to October’s labour market data. With surprisingly weaker payrolls data last month, the expectation is for a strong number, which would support further hikes from the Fed. Wages are likely to show further increases and could hit 3.2% which would be the highest level since 2009. The US economy continues to look strong, with third-quarter growth last week coming at 3.5%. In spite of this, the market expectations of a further rate hike in December have fallen after the falls in global equities.
Concerns remain on shaky global stock markets last week as US corporate results failed to reassure nervous investors. The Nasdaq is down almost 12% since September, which is could end up being its worst month since the financial crisis. The US will remain the centre of attention, with only a couple of weeks before the mid-term elections. The Federal reserve will remain a keen observer, as analysts wonder what their reaction will be with rate hikes. The expectation of further rate hikes in 2019 has also fallen.
GBPUSD – 1.2835
EURUSD – 1.1394
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*Interbank rates correct as at 7 am on the date of publishing