How will BREXIT affect UK inflation figures this week?..
Week Commencing Monday 17th October 2016
US: FOMC back on the bull surge!
Minutes from last month’s FOMC meeting have shown that the decision to hold interest rates was closer than expected.
The Federal Open Market Committee left the benchmark lending rate unchanged in a range of 0.25 percent to 0.5 percent for the sixth straight meeting last month, even as a majority of the 17 participants still forecast at least one hike this year.
Uncertainties over the economic outlook and the desire by the committee to assure that job growth remains strong are likely to delay another rate increase until December. Continued concerns over global growth, especially Brexit, have spooked a number of committee members and led to calls for a more cautious hiking path.
Despite these concerns the US economy continues to push ahead on the back of solid consumer spending and decent payroll figures. Payrolls rose by 156,000 last month, bringing the monthly average to 178,000 this year compared with 229,000 last year.
UK: E&Y forecasts a weaker near term as inflation hits growth.
The Ernest and Young Item Club has said that the UK economy faces “prolonged period” of weaker growth as consumer spending slows and business investment fizzles out.
This is despite the Office for National Statistics revised up its reading for the UK economy in the runup to the Brexit vote, with GDP growing 0.7 percent in the second quarter, up from a previous estimate of 0.6 percent for the period.
While the UK’s main economic indications have held up since Britain voted to exit the EU, sterling has lost around 18 percent of its value against the US dollar since 23 June.
The EY Item Club report said a weak pound would cause exports to rise by 4.5 percent in 2017 and 5.6 percent 2018. It said net exports are expected to add 0.8 percent to GDP next year, accounting for nearly all of the expected growth in the UK economy.
EUR/USD continued to track down last week as Brexit woes and a bullish FOMC weighed on the single currency. As we have little in the way of US data this week, all eyes will be on Mario Draghi on Thursday, and with trends to the downside we expect 1.09 – 1.0850 on the cards.
GBP/USD held just above the 1.20 level last week as the aftermath of the flash crash continued to be felt. With inflation the only release of note from the UK this week we expect to see a continuation of the current bearish trend, with Sterling support at 1.20 growing. As per usual, expect any Brexit speeches by politicians or policy makers to drive the market lower.
GBP/EUR should have an interesting week as markets look forward to both Mario Draghi and UK inflation this week. Sterling remains on the back foot despite its large losses last week, with 1.10 a significant barrier. If breached we could see the rate drop to as low as 1.08 this week, especially if we see some shock announcements surrounding Brexit from politicians and/or policymakers.
Economic Calander for the Week
We have a relatively quiet week for the UK with inflation figures for September the only releases of note. We expect the headline rate on inflation to pick up from 0.6 percent to 0.8 percent in the month as a weaker Sterling pushes up import prices.
Core numbers should also show a uptick from 1.3 percent to 1.4 percent.On the non-data front, traders are watching politicians as usual with focus currently on Phillip Hammonds softening Brexit stance.
We have a very light week in the US with no market moving data expected. Stanley Fischer’s speech on Monday may be a highlight if he backs a more hawkish rate stance than his peers within the FOMC, while the Beige Book and Initial Jobless Claims on Wednesday and Thursday respectively could also be worth a watch.
All eyes will be on Mario Draghi’s policy statement on Thursday and while we do not expect any shift in interest rate direction, his comments always play havoc on the markets. We expect any comments surrounding Brexit or the ongoing funding difficulties in Italy to push down the Euro.
Outside the ECB we look forward to European inflation figures on Monday, which should come in flat on the month at 0.8 percent.