Brexit negotiations continue

GBP – Election coming up?

Parliament returned from recess last week and MPs inflicted defeats on the government Brexit strategy. The Hilary Benn bill received backing from the House of Commons and Lords.  Royal assent is expected today.  This bill forces the Prime Minister to ask the EU for a delay to the 31 October Brexit deadline of three months if there is no new deal with the EU.  The government has responded by trying to push forward with a General Election, though the opposition parties are not keen until the delay is agreed. Meanwhile, Boris has said he would rather ‘die in a ditch’ than ask for an extension.  The government now seems to be trying to work out whether they legally have to seek an extension.

Manufacturing and services PMIs weakened to 47.4 and 50.6 respectively for August.   The economy seems to be weakening and further clarity will be sought in the GDP figures released today.  We expect monthly GDP to have risen by 0.1%, which would be in line with three-monthly growth of -0.1%.  The momentum through the quarter may be slightly less downbeat than recent survey evidence. A slow but positive result for third-quarter GDP seems most likely. We expect employment growth to have slowed with a small rise in the unemployment rate.

GBPEUR – 1.1128

GBPUSD – 1.2268

EUR – ECB to cut rates

The main event in the Eurozone this week is the ECB policy announcement. More stimulus is expected, given weakening economy and low inflation. There may also be a package of measures as was hinted by President Draghi in July. There has been disagreement from some ECB Council members on the need for more net asset purchases.  We expect the ECB to reduce interest rates by 10bps to -0.5%. They are also likely to signal the possibility that rates could fall further.  It may also announce a ‘tiering’ of the deposit rate to mitigate the negative impact on the profitability of banks.

New ECB economic forecasts, with potential growth and inflation downgrades, may support the case for a bolder package of measures.  Part of the pushback against more QE may reflect concerns that monetary policy is reaching its limits. French and Italian industrial production will give some insight into their economies strength, with the Eurozone number also released. Over the weekend, the French and Dutch ministers suggested no further three month extension to Brexit would be forthcoming, which possibly increases the chance of an election.

EURUSD – 1.1024

EURGBP – 0.8986

USD – Weaker US data

US economic data was mixed last week which will give Fed officials food for thought ahead of the September meeting.  Markets are expecting a further rate cut. Last week’s ISM manufacturing was much weaker than expected, falling below the 50 growth/contraction level for the first time since 2016. The non-manufacturing ISM, however, jumped up to 56.4. Nonfarm payrolls were far weaker than the expected close to 200k number, coming in at 130k.

This week, the focus will be on CPI inflation and retail sales. Retail sales are expected to rise again, suggesting consumer spending remains healthy. However, Fed decision makers will be aware of global economic headwinds affecting industrial activity. Inflation at the end of the week is likely to remain steady at 1.8%. Financial market risk sentiment has been supported by reports that US-China trade talks will resume next month.

GBPUSD – 1.2268

EURUSD – 1.1024

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*Interbank rates correct as at 7 am on the date of publishing