Developments in politics key

GBP – EU summit key

The EU summit is a key step in the Brexit negotiations.  Negotiations continue and apparently, some progress has been made. However, questions remain on whether a further summit will be needed in November with continued uncertainty on the Irish border issue in both Brussels and the UK. Prime Minister May joins the summit on Thursday after Mr Barnier briefs the EU leaders on Wednesday evening.  A Cabinet meeting on Tuesday may provide further clarity on the Government’s position ahead of the summit. 

Data will no doubt take a back seat to the EU discussions, though unemployment and weekly earnings growth are both likely to remain stable. Bank of England Chief Economist Andy Haldane commented that there will be a ‘new dawn’ for wage growth which he expects to more significantly impact inflation.  We will see the latest inflation figures on Wednesday with both ‘headline’ and ‘core’ expected to dip slightly. Meanwhile, retail sales data will give further insight into third-quarter growth after a strong GDP reading last week. 

Further fragility has been evident in markets with equities at their lowest levels in over a year. Bond yields are also elevated across major markets.  Brent crude has continued the slide we saw last week, currently trading just above USD80 per barrel. All of this suggests markets are nervous with the uncertainty around the impact of tariffs and political instability.

GBPEUR – 1.1355

GBPUSD – 1.3125

EUR – Italian budget saga

Clearly, the EU Summit will also be one of the most significant events in Europe this week.  The key will be whether EU leaders feel enough progress has been made to agree to a further summit in November.  Comments from French president Emmanuel Macron suggests the European leaders will not agree to a further summit unless there is the making of a draft agreement in place. 

Italy will present its draft 2019 budget to the European Commission today which may bring some clarity in this budget saga.  The populists have stood their ground on deficit targets so it remains to be seen whether the commission rejects their forecasts due to non-compliance.  If that is the case, Italy would likely have a further month to revise their forecasts.  

Elsewhere, the German ZEW survey will give insight into sentiment in the major EU economy after weak industrial production figures.  Eurozone industrial production was far stronger overall with an increase of 0.9% with the only major European data this weak being inflation numbers. 

EURUSD – 1.1558

EURGBP – 0.8807

USD – FOMC minutes

The markets in the US have focused heavily on falls in equities as US rates and bond yields rise.  There are concerns over the impact of tariffs on the economy alongside increasing interest rates.  This is partially explained by recent data with inflation and wages weaker than expected.  This has led to a slight reduction in the expectation for future Fed rate hikes. The market is currently pricing in just over two 25 basis point hikes in 2019.

We will see further colour on the views of the Federal Reserve with the minutes from the September FOMC meeting.  There are also a number of Fed speakers who may provide further insight into their take on the weaker recent data. No significant surprises are expected following governor Powell’s speeches last week, though references to the neutral rate and potential risks to domestic growth could be key.  Industrial production and retail sales data are likely to show continued strength, which would suggest a solid third-quarter GDP figure next week.  

GBPUSD – 1.3125

EURUSD – 1.1558

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