key EU summit

GBP – Sterling rebounds on hopes for Brexit 

Boris Johnson’s strong preference appears to be to agree a deal at the key EU Summit that he can take to parliament. The hope for a breakthrough at this EU Summit led sterling sharply higher at the end of last week. The UK government has called for a special session of parliament for next Saturday after the summit to allow the PM to report back. If a deal is not imminent by then, the ‘rebel alliance’ will renew demands that he asks the EU for an extension to the exit date. We start this week with the Queen’s Speech.

In addition to the Brexit events, there is a busy economic calendar. Tomorrow’s labour market report is likely to show the unemployment rate holding at its historic low of 3.8%.  Pay growth is expected to rise again to 4.1%. Meanwhile, September CPI inflation is likely to have risen to 1.8% though this remains slightly below the 2% target. Finally, retail sales are likely to have rebounded following August’s 0.2% decline. Overall, this suggests that consumers will continue to spend and that the sector will continue to support economic growth.  GDP fell by 0.1% in August but an upward revision to July leaves economy on track for a solid third-quarter

GBPEUR – 1.1417

GBPUSD – 1.2593

EUR – EU Summit key for Brexit

It is an important week for the Brexit process with the key EU summit on Thursday and Friday.  This is set to decide on whether a deal can be achieved before the 31st October exit date. Early last week, the negotiations appeared to be dead in the water as EU leaders dismissed Prime Minister Johnsons alternative backstop proposals.  However, the mood changed on Thursday following more positive talks between Johnson and Irish PM Varadkar. The EU’s chief negotiator Barnier agreed that talks should go into the intense tunnel phase to try to thrash out a deal ahead of the key EU Summit.  Though, it remains unclear what difference it will require for the Irish backstop.

In the Eurozone already figures for some of the larger economies point to a modest rise in industrial production of 0.3% in August. That is a relief after previous falls, but ongoing weakness in orders, suggests the sector remains fragile. The German ZEW survey is forecast to show a fall in both current conditions and future expectation in October. This continues to highlight the overall economic weakness in the Eurozone.

EURUSD – 1.1030

EURGBP – 0.8759

USD – US suspends China tariff hike

The mood was negative on the trade talks early last week. However, Thursday’s talks in Washington according to President Trump went ‘really well’. On Friday, the US agreed to suspend the next tariff hike on Chinese imports.  The talks on further phases of negotiations is due to start once this phase is completed.

Fed Chair Powell’s comments did little to shake market expectations that another near-term interest rate cut is likely.  Markets are pricing around 70% probability for an October rate cut and an even higher chance of a cut before year end. If the Fed does plan to leave policy unchanged it would be expected to send a signal over the next couple of weeks. The probability of may however fall further as hopes of an ongoing trade deal have gone up. The Fed had pointed to trade tensions as being a downside risk for the economy so even this partial deal may be seen as a reason to remain on hold for now.

This week, September retail sales will be of most interest. Consumer spending has also been a key support for US economic growth and markets expect a 0.3% monthly rise. In contrast, a fall in September industrial production may highlight ongoing issues in manufacturing. Housing starts will be watched for signs that lower interest rates are providing support. Inflation last week held at 1.7%

GBPUSD – 1.2593

EURUSD – 1.1030

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