Does a vote become less meaningful once it is the third ‘meaningful’ vote? We are primed for this third vote in the House of Commons tomorrow, but only if there appears to be sufficient support from the DUP and Tory backbenchers. Whether the vote is successful will affect how long an extension is sought from the EU. With an agreement, a short delay to June will be sought, whilst without agreement, it is likely to be a much longer delay to leaving the EU. The EU Summit starting on Thursday will consider either request or further discussions around the withdrawal agreement. Further, if the vote is defeated, it is likely we could see another vote of no confidence in the government.
Although markets have factored in a fall in the risk of a ‘no deal’ scenario, the uncertainty around Brexit remains firmly in place. Combined with growing headwinds to the global economic outlook, it suggests the Bank of England will keep interest rates firmly on hold at 0.75%. Recent speeches from MPC members confirm that they are in wait-and-see mode. Based on the assumption that a disorderly Brexit is avoided, markets expect interest rates to be raised in the second half of this year.
The most important UK data releases labour market report, CPI inflation and retail sales. Evidence suggests that employment growth slowed in January, and there could be a small increase in the unemployment rate. Earnings growth is expected to fall to 3.1% for the three months to January. The upward pressure on wage growth is expected to resume if Brexit uncertainty subsides. Inflation is forecast to have stayed at 1.8% in February, while core CPI is also expected to be unchanged, at 1.9%. For retail sales, we expect a drop to 0.8% following the surprisingly strong 1.2% rise in January. Real pay growth has risen over the past year, reflecting both higher nominal pay increases and lower inflation.
GBPEUR – 1.1709
GBPUSD – 1.3281
On the continent, one of the most significant events of the week will be the EU leaders’ summit mentioned above. Any extension sought by the UK will require unanimous agreement from the EU27. This should be relatively straightforward for a short extension but will require some further information on the next steps if a longer extension is sought.
The key interest will be on the economic data front will be from the ZEW investor survey and from the Eurozone, French and German ‘flash’ PMI surveys. We expect a further fall in the German ZEW current situation index in March, but the expectations component is forecast to rise for the fifth month. For the Eurozone manufacturing PMI, markets expect a small rise to 49.5 in March, which would be the first rise in eight months, but remains in contraction rather than growth. Services PMI, however, is forecast to fall slightly to 52.5 after last month’s unexpectedly strong rise. Overall, this is in line with Eurozone first quarter GDP growth of around 0.2%, which would match last quarters growth.
EURUSD – 1.1343
EURGBP – 0.8540
The major event this week will be the US Federal Reserve interest rate announcement on Wednesday. Interest rates will be kept on hold at 2.5% for now, with the statement expected to emphasise ‘patience’ regarding further policy tightening. The key focus will be on the Fed’s new economic and interest rate projections. Members will probably reduce the number of rate rises signalled this year from two to one. The could also be further details on ending the rundown of the balance sheet this year. Chairman Powell’s press conference will be closely watched for possible nuances on risks to central forecasts.
From last week, US January retail sales rebounded, though February core CPI fell unexpectedly to 2.1%. This week is a relatively quieter week, with the highlights being factory orders, the Philly Fed survey and the flash PMIs at the end of the week. The expectation is for continued robust data which will leave the Federal Reserve with something further to consider.
GBPUSD – 1.3281
EURUSD – 1.1343
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*Interbank rates correct as at 7 am on the date of publishing