key EU summit

GBP – Conservative’s Party Conference

Last week saw a significant focus on the Labour Party Conference which came to an end on Wednesday.  There was relatively little reaction from the market, though there was a push for a general election, suggestions of a further referendum on Brexit and rejection of Prime Minister May’s Chequers arrangement.  This week we see the focus shift to the Conservative conference which began yesterday.  Mrs May will deliver her main speech on Wednesday though this may avoid detailed Brexit discussions and seek to bring the party together. Internal party politics will likely be of greatest significance from the Conservatives. 

We are unlikely to see anything of major significance from the Brexit negotiations.  Once the Conservative conference closes, the focus will shift to negotiations towards the EU leaders’ summit on 18th/19th October. The EU has said they expect ‘maximum progress’ before deciding whether to call an additional summit in November. 

Last week saw second-quarter GDP revised down slightly to 1.2% from 1.3%.  A more robust set of readings is expected this week with September purchasing manager indices.  Manufacturing PMI today is expected to dip slightly, along with services PMI on Wednesday.  Along with construction PMI tomorrow, they are still expected to show that business sentiment is holding up well against the backdrop of ongoing Brexit uncertainty. 

GBPEUR – 1.1243

GBPUSD – 1.3030

EUR – Italian budget deficit conflict

There were comments from Mr Draghi last week reaffirming his support for the ECB’s ‘core’ inflation forecast.  This suggests that expectations for future ECB tightening remain intact even though inflation remains stable.  Though inflation remained at 2.1% last week, the ‘core’ measure dropped slightly to 0.9%.  Mr Draghi’s comments come despite increased trade tensions.  

Export expectations fell in the September PMIs with the German reading falling to a five year low of 48.2 and showing contraction rather than growth.  These figures are likely to be confirmed by second readings of PMIs this week.  There will also be retail sales and unemployment figures to give an idea of domestic demand.

Italy set their budget target at a deficit of 2.4% which risks further conflict with the EU.  This deficit target of 2.4% is seen as a victory for the populist coalition.  The concerns over implications saw Italian stocks fall and bond spreads rise with concerns over how this will play out for Italian companies after December. 

EURUSD – 1.1589

EURGBP – 0.8894

USD – Fed hikes by 0.25%

The Federal Open Market Committee raised policy rates by 0.25% to 2.00-2.25%, as widely expected.  Focus now shifts to whether we see a further hike in December and a further three hikes in 2019. Having kept its ‘dot-plot’ forecast for the next two years largely unchanged, the Fed expects the rate to rise above their estimated ‘neutral’ rate late next year. The current rate of US growth and steadily rising inflation, mean that between two and three further hikes are already priced in for next year. 

Attention will turn again to the labour market report on Friday, which is likely to show another sizeable increase in employment close to 200,000.  This may see the unemployment rate fall further. The wage growth numbers will be of most interest, particularly after the larger gain in August.  The tighter labour market appears to be feeding through to earnings growth which will ultimately drive inflation and steer the Feds hand on rate hikes.  

President Trump’s contentious address to the UN General Assembly was followed by further hawkish comments regarding both China and Iran at the UN Security Council. Trade tensions remain unresolved and talks look unlikely to progress until after the US Midterm elections in November. 

GBPUSD – 1.3030

EURUSD – 1.1589

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