Last week much of the focus was on the political gamesmanship between the UK and EU with regards to trade talks as we approached the self-imposed deadline of the EU Summit. In the early part of the week it appeared that progress was being made, however, on Thursday (the start of the EU Summit) rhetoric started to turn sour. Sterling was fragile following comments on trade talks in which EU leaders stated that the UK needs to make “the necessary moves” for an agreement. UK chief Brexit negotiator David Frost said he was “surprised” at the suggestion. Indications are that negotiations are likely to continue for more weeks. Fisheries remain one of the sticking points.

On Friday morning PM Johnson stated that the UK will now prepare for ‘no trade deal’. Talks are scheduled to continue this week but whether they happen given the rhetoric is unclear. Cabinet minister Gove stated on Sky News on Sunday “I want a deal, I’m keen to conclude one, but it takes two sides”. Sterling remained range-bound despite the ongoing uncertainty. That said, there wasn’t any fresh ground broken as sentiment echoes a tone of déjà vu.

COVID new cases continue to raise concerns as infections rise with London, Essex and York among areas moving to ‘tier two’ whilst Greater Manchester is pushing back against a move to ‘tier three’. In Europe, there have been stronger restrictions implemented in several major cities with the obvious growth concerns becoming more apparent. This may be part of the reason we have seen additional signposting of further stimulus from EU officials.

  • In the meantime, the US Presidential race continues with their respective town hall events being held last week. The current odds are
    Real clear politics (betting aggregator) – 65.7% probability of Biden winning
  • FiveThirtyEight (in house methodology – have run 40,000 simulations) – Have Biden winning 87 in 100

Looking ahead to this week, the focus is likely to remain on the UK/EU trade talks and whether we see any progress in these discussions should they happen as scheduled. Biden and Trump are scheduled to have another live debate on Thursday.

Monday

  • FOMC Chair Powell Speaks
  • ECB President Lagarde Speaks

The respective heads of both the European and US Central banks are due to speak and participate at different events. As heads of their central banks, the markets tend to focus on the comments for any signposting of future policy action. Powell is due to participate in a panel discussion about cross-border payments and digital currencies at the International Monetary Fund’s annual meeting. Meanwhile, Largarde will deliver opening remarks at the ECB Conference on Monetary Policy.

Tuesday

  • EU Current Account
  • US Pending Home Sales and Housing Starts

The EU current account will be monitored to ensure its healthy condition remains in a positive position to provide support if required during these troubled times. The US housing data will be watched for signs of growth.

Wednesday

  • UK Inflation
  • UK Public Sector Borrowing

The UK’s September CPI inflation is likely to post a modest rise as the Chancellor’s ‘eat out to help out’ scheme comes to an end. Public sector finances for September are expected to show the deficit continues to rise at a rapid rate as borrowing continues to grow during COVID. This data will be closely monitored ahead of the central bank meeting given the ongoing speculation that the UK could face negative rates next year.

Thursday

  • BoE Gov Bailey speaks
  • US Jobless Claims
  • US Presidential Debate

Bank of England Gov Baily is due to speak at the annual Waterline Summit, as head of the central bank and the ongoing speculation of negative interest rates his comments will be closely watched. Meanwhile, the US jobless claims are due which have been increasing of late. The second Presidential debate is likely to take centre stage as we enter the final furlongs of the race.

Friday

  • UK Retail Sales
  • UK/EZ and US PMI Service/Manufacturing

Economic activity and its pace will be closely monitored here in particular from the UK and Eurozone where COVID is on the rise with tighter restrictions being installed. September retail sales. Retail activity in the UK is one area that has recovered sharply post lockdown, and overall activity is now back above its February level, although much of the activity continues to be online. There are question marks about whether consumers will continue to spend given uncertainties.

Last month, both UK manufacturing and services PMIs slipped from very high levels in August but stayed well above the key 50 levels consistent with economic expansion. Further slippage in October is expected, but for both measures to stay above 50 and so signal continued growth. In the Eurozone, September saw a sharp fall in the services reading below 50, but a modest rise in manufacturing. If both sectors continue to lose momentum it could result in the composite measure below 50 for the first time since June.

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

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