Brexit negotiations remain the key focus for UK markets as hopes rose last week for a breakthrough. But with the resignation of another MP, Jo Johnson, it is clear that PM May still has a challenge ahead to find a deal that is acceptable to the EU and the UK parliament. The Irish border issue remains a sticking point. Time is running out to get agreement from the EU before Christmas, with a November summit looking less likely and the EU Summit on 13th/14th December the last chance before the recess.
Fridays’ reading for third-quarter GDP growth of 0.6% was the biggest quarterly rise in almost two years. The rise likely exaggerates the pace of growth. Business surveys for October point to a slowdown in the final quarter of the year. This, we expect to see accelerating UK wage gains showing that inflation pressures are building. Thursday’s October retail sales report may show further signs of a weaker economy.
Last week’s relatively hawkish comments from Bank of England Governor Mark Carney signs that wage growth is now accelerating in response to a tight labour market. Regular wage growth is expected to be up 3.2% from a year ago. If we see a deal on Brexit, it seems likely that the Bank of England could raise rates by the middle of next year.
GBPEUR – 1.1415
GBPUSD – 1.2880
The Italian budget dispute continues as the deadline approaches to submit new proposals to the EU. The European Commission forecasts also highlighted concerns about the Italian budget. With Tuesday’s deadline for Italy to submit a new budget to the EU fast approaching, there is no sign that the Italian government will back down and submit a less expansionary budget.
The second reading for third-quarter Eurozone GDP is show growth slowing to 0.2% from 0.4%. Some of this slowdown was probably due to temporary factors including the new German fuel emission rules. That had a short-term impact on car production that is expected to have resulted in a fall in German third-quarter GDP. This may pick back up in the fourth quarter as these temporary factors recede.
Given the ongoing Brexit negotiations at home, any reaction to proposals put forward by PM May by European decision-makers will be watched for with interest.
EURUSD – 1.1283
EURGBP – 0.8760
The US Midterms resulted in split control of Congress, which may limit President Trumps policymaking. Last week’s monetary policy announcement from the US Federal Reserve was largely a non-event. The central bank continued to describe the economy as ‘strong’ and said again that ‘further gradual’ interest rate hikes are likely. A fourth US rate increase for this year still seems to be likely in December. Further hikes will no doubt follow next year unless the pace of growth slows significantly.
There are a number of US data releases this week. The most closely watched is likely to be the October inflation and retail sales figures. Oil price gains are expected to push annual inflation to 2.5% from 2.3%. Retail sales are expected to have increased by a significant 0.7% rise. These figures are likely to reinforce expectations that US rates continue to rise.
GBPUSD – 1.2880
EURUSD – 1.1283
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*Interbank rates correct as at 7 am on the date of publishing