Last week Sterling fell to multi-month lows against both the US Dollar and the Euro as Brexit negotiations soured following the wording of the proposed UK Internal Market Bill being released. If passed this will breach the Withdrawal Agreement and break international law. As a result, we saw tensions between the UK and EU intensify. The EU commission stated that the emergency meeting of the UK-EU joint committee had not cleared EU concerns over the Internal Market Bill. It rejected the UK contention that it would protect the Northern Ireland peace agreement and called for measures to be withdrawn by the end of September at the latest, and legal action has been threatened. There was confirmation that the talks would continue this week which provided an element of relief.

Meanwhile, the big market event of the week was the ECB meeting. In the week prior, there was concern and speculation over the current strength of the single currency, prompting the currency to weaken in the period leading up to the meeting. The ECB made no changes to interest rates at the policy meeting and there were also no changes to the quantitative easing programme with bond purchases continuing under the PEPP scheme. The forward guidance was unchanged with bond purchases set to continue until at least June 2021 and interest rates remaining extremely low. The economic assessment was slightly more optimistic from ECB President Lagarde. She noted that the deflation risks had declined slightly since June despite the very weak inflation figures for August. As a result, we saw the Euro strengthen.

Looking to the week ahead, it will be a busy week in terms of political development and economic news. Brexit is likely to dominate headlines following the tension this week. As mentioned earlier, talks between the UK and EU are set to continue. Also, the controversial Internal Market Bill will be further discussed in Parliament. Some commentators are suggesting that the Bill may struggle in the House of Lords. In terms of economic releases, both the UK and US will be hosting central bank meetings with no change expected, however, the rhetoric that follows will be watched carefully. Both nations will also be releasing key economic data – labour and consumer.

Monday

  • EU Industrial Production

Economic activity is being closely watched as there are signs of momentum slowing. Concerns about the strong currency have helped fuel this further. Of more interest following last week’s tensions may be the Internal Market Bill which will be debated in the House of Commons.

Tuesday

  • UK Claimant Change
  • German ZEW Survey
  • US Empire Manufacturing

Recently economic data from the UK has been robust. With restrictions being lifted in the UK, the market will be focused on how this could impact employment rates in the nation. However, the market may not react to this as the furlough scheme is still running and is due to expire at the end of October with adjustments starting to taper from this month. In the meantime the German ZEW, which surveys 300 German institutional investors which will provide their thoughts on the current and 6-month view of the economic landscape.

Wednesday

  • UK Inflation
  • US Retail Sales
  • US FOMC Meeting

With the Bank of England signalling that interest rates are going to remain low for an extended period, market attention is not as heavily focused on inflation. Still, inflation can be seen as a by-product of growth, so growth will likely be monitored as a gauge of the sustainability of the economic recovery. US retail sales will be monitored as a continued gauge of economic recovery. The FOMC meeting is likely to be the headline event as the market will decipher the rhetoric for clues on future policy action from the central bank and its ongoing view of the economic recovery as well as its path moving forward.

Thursday

  • UK BoE Meeting
  • US Initial Jobless Claims

Speculation is once again starting to mount regarding negative interest rates, the market will be keen to see if the BoE elaborates further on this subject matter. This follows comments from BoE Gov. Bailey where he stipulated they were under consideration by the central bank. No change is expected in policy but with the fear that the economy could start to lose momentum post furlough, the market will be keen to see the BoE’s current view on the economy. At the same time, the market will watch the US weekly jobless claims, last week the figure was expected to slide but grew slightly, as a result, the market will be keen to see if this was a blip or the start of a wider trend.

Friday

  • UK Retail Sales
  • US UoM Consumer Sentiment

The pace of UK retail sales is expected to decline from last month, should this miss expectations of 0.8%, this could be worrying for the future path of economic growth. In the US, consumer sentiment will be watched as a gauge to forecast the projected growth amidst the COVID environment.

Read our Monthly FX Forecast for a longer-term view of currency movement.

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