Another bout of Brexit optimism boosted the pound last week. Comments from European Commission President Juncker about being open to alternative arrangements suggest that a deal could happen by the end of October. Boris Johnson is expected to meet EU Council President Tusk at the UN this week. Meanwhile, the UK Supreme Court rules on the legality of Parliament’s prorogation in the next couple of days. If either of the prorogation court cases go against the Prime Minister, he will have to recall parliament.
August inflation was surprisingly weak, falling to 1.7%. The BoE MPC decided unanimously to leave policy unchanged as expected. The minutes noted uncertainty the US-China trade war and Brexit. The BoE also said that the margin of spare capacity in the economy had increased. A number of Bank of England speakers are also due this week, where further thoughts on inflation may be given. The CBI industrial and retail surveys and GfK consumer confidence will hold some market interest.
With Party conferences under way, Jeremy Corbyn has said he would renegotiate a closer relationship with the EU and hold a referendum on its new deal or ‘remain’. The latest YouGov poll shows Labour support (21%), behind the Liberal Democrats (24%) and the Conservatives (32%), which could make for an interesting election when it does happen.
GBPEUR – 1.1313
GBPUSD – 1.2472
Some key Eurozone surveys for September will be released next week to provide a more up-to-date gauge of economic activity. The most important surveys will be the Markit flash PMIs and the German IFO. We expect a slight improvement in Eurozone manufacturing PMI to 47.2. There is also likely to be a small decline in the services PMI. The PMIs point to Eurozone GDP growth being similar to the second quarter level of 0.2%. The German IFO survey may well provide the first improvement in six months.
ECB President Draghi will make his final testimony to the European Parliament, following the decision to restart Quantitative Easing. There was unusually strong public pushback from prominent ECB Council members, including the heads of the German and French central banks. The decision to link net asset purchases to the inflation outlook seems to tie Draghi’s successor, Christine Lagarde, to QE for an extended period. Even Draghi seems to have accepted the limits of more monetary easing. Fiscal policy is likely to play a much bigger role in the next economic
EURUSD – 1.1024
EURGBP – 0.8839
The Fed cut rates last week for a second successive meeting, by 25bps to 2.00%. They also announced measures to reduce pressures in the money markets including a larger 30bps reduction to 1.80% in the IOER (interest on excess reserves). The ‘dot plot’ of future expectations showed a stark division on the need for more rate reductions. Seven suggest another cut will be needed this year, whilst five expect no change and five think rates should be higher. There are plenty of Fed speakers this week, which is likely to give more insight into the differing views on offer.
The US data focus includes the third estimate of second quarter GDP and the PCE deflator figures. Second quarter GDP is expected to come in unchanged at 2.0% with an increase in the ‘core’ PCE deflator to 1.8%. This would be the third consecutive monthly rise and is somewhat at odds with the recent rate cut. Other key data releases include new home sales, advance goods trade balance and durable goods orders.
GBPUSD – 1.2472
EURUSD – 1.1024
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*Interbank rates correct as at 7 am on the date of publishing.