key EU summit

GBP – Bank of England to hold

The Bank of England is unlikely to cut rates this week. We expect a unanimous vote for no change to policy. There is no Inflation Report or press conference so there will be little new information. Governor Carney recently noted that the downside risks for UK economic growth had gone up.  On the other side, a tight labour market is putting upward pressure on wages which may lead into inflation.

On the data front, inflation data is expected to slip below the Bank’s target in August.  This is partly due to the competitive pressures on retailers that are suppressing price inflation. Meanwhile, August retail sales is forecast to be flat. On this basis, fundamentals for consumer spending are generally solid which continues to support UK growth.

Last week saw the Benn Bill passed and the House Commons reject Boris’ second call for an early general election. Parliament was then prorogued until 14th October, although a Scottish court has since ruled that the advice was unlawful. The Supreme Court is expected to hear the appeal on this on Tuesday, which could lead to an early recall for parliament. Brexit talks continue and Mr Johnson is meeting outgoing EU President Juncker today.

GBPEUR – 1.1264

GBPUSD – 1.2467

EUR – ECB cuts rates to -0.5%

Last week, the ECB announced a 10bps reduction in the deposit rate to -0.5%.  They also introduced a rate tiering system, which is supposed to reduce costs to large banks of holding deposits. The ECB also announced the resumption of Quantitative Easing at €20bn from November until its inflation mandate is met. Despite the more positive mood, markets still expect central banks to provide more stimulus as insurance against slowing growth. Following last week’s moves from the ECB, five more central banks will give policy updates next week, including the Swiss and Norweigan banks.

According to President Draghi, there was a ‘clear majority’ for more QE, but a number of ECB policymakers have disagreed with the extent of stimulus provided. On Friday, Austrian Central Bank Governor Holzmann said that the idea of a policy mistake “definitely crossed my mind”, while the Netherland’s Knot called it “disproportionate” and Germany’s Weidmann said the ECB went overboard. A number of other ECB members are due to speak this week.

EURUSD – 1.1068

EURGBP – 0.8878

USD – Fed to cut rates

Last week saw a rise in global equities with signs of progress in US-China trade talks.  US Treasury Secretary Mnuchin said that US and China had made progress in recent talks. China announced the exemption of some US goods from its recent tariff hikes.  Meanwhile, President Trump gave a small delay in the US tariff increase due in October. It is hoped that talks next month may yield some further progress.

The US Federal Reserve will be the main focus this week.  The Fed are expected to cut rates for the second month in succession.  It is likely that the cut will be 25 basis points, to take the range down to 1.75%-2.00%.  There has been speculation of a larger decrease of 50bpm but this is seen as unlikely.  The rate setting Committee will probably leave the door open for further rate reductions by maintaining an easing bias in its policy statement.

Fed policymakers will also update their economic forecasts, including their interest rate projections. This month’s forecasts will reflect the rate moves since June and may include expectation of additional easing. However, the forecast cuts are still unlikely to match the more significant decreases that are expected by markets.

GBPUSD – 1.2467

EURUSD – 1.1068

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