Last week’s EU summit in Brussels, where Brexit negotiations were key, did not go well for Theresa May. Politics remain key for sterling and the main outcome was no confirmation of a November summit given the lack of progress. The focus for Brexit has now shifted towards the December summit, though an earlier meeting remains a possibility. Meanwhile, Mrs May remains under fire at home, with concerns raised on all sides over the proposed extension of the transition period. Sterling will no doubt continue to be buffeted by any further Brexit developments.
The recent data continues to have relatively little impact on sterling. Last week we saw an increase in wage growth with a 2.7% increase in the three months to August. Meanwhile, Inflation fell, with ‘core’ inflation falling below 2%. Retail sales were also softer than expected in September. With very little data out this week, we are likely to continue to see a reaction to political and Brexit-related developments. In this way, sterling’s softness it has largely overlooked relatively resilient economic data.
GBPEUR – 1.1350
GBPUSD – 1.3067
One of the major events in Europe this week is the European Central Bank meeting. The ECB is expected to leave rates unchanged and restate their commitment to end net asset purchases by the end of the year. The ECB’s policy decision on Thursday will be followed by President Draghi’s press conference. Concerns were raised at the previous meeting over protectionist policies and financial market volatility. Growth forecasts were revised down previously and inflation remains around 2%, though ‘core’ inflation is well below target at 0.9%.
Concerns remain around Italy’s budget, with an explanation of the deviation expected to the EU leaders early this week. S&P is expected to deliver an updated rating decision at the end of this week, with a downgrade likely. Moodys are expected to review their rating at the end of the month.
This week has some significant data with Eurozone PMIs giving the first signs of economic growth for the fourth quarter. Manufacturing and services are expected to have fallen. The German IFO survey will provide further sentiment on the EU’s largest economy. Last week’s German ZEW survey showed a marked fall in the expectations component which does not bode well. This week will also see policy decisions from the Riksbank and Norges Bank. No change is expected from either.
EURUSD – 1.1513
EURGBP – 0.8811
The data in the US paints a relentlessly positive picture. Last week saw industrial production continue to grow strongly. Retail sales were higher, but only marginally. This week, we expect the third quarter GDP numbers to confirm the continued strength of the economy, showing an annual rate of around 3.6%. Meanwhile, September’s durables goods orders are expected to dip slightly on the month. The large-ticket transport element means that this can be a volatile number. The positive data supports further rate hikes and could mean potential increases to the Fed’s 2019 forecasts.
With a further interest rate decision in North America, Canada is likely to follow the US path of interest rates, with a third hike this year. The Bank of Canada remains behind the Fed in its increases, but recent elevated inflation and the progress on the trade deal with the US and Mexico suggest that rates will be lifted. Elsewhere, ongoing US trade negotiations and withdrawal from the Nuclear treaty will continue to concern markets.
GBPUSD – 1.3067
EURUSD – 1.1513
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*Interbank rates correct as at 7 am on the date of publishing