The pound finished down 1.3% against the dollar last week after hitting an 8-month high of 1.3482 on Tuesday. Against the Euro, the pound ended the week flat but a 3-month high 1.1280 was hit on Wednesday. The pound saw most of its weakness come off the back of a Reuters report that the UK accepts continuity with the EU state aid and fisheries policy but said that it is simply not compatible with the UK’s status as a fully independent country. Most analyst are currently pricing a no deal Brexit at 30%, but with similar negative headlines likely to continue the probability of a no deal will increase and in turn the pound likely to fall further.
The focus for this week is the 8th round of UK – EU Negotiations taking place between the 8th and 10th of September. Fisheries will again be one of the main topics of conversation taking up Tuesday evening and the whole of Wednesday. Other topics comprise include: a level playing field for open and fair competition; trade in goods; horizontal arrangements plus governance. Without a breakthrough in this round of negotiations then the October deadline looks likely to be breached. On the data front, UK GDP for July is expected at 6.7% and should show signs of continued economic recovery post lockdown.
The dollar was the second best performing G10 currency with only the Canadian dollar outperforming its neighbour last week. However, the greenback’s recovery was not strong enough to confirm bottoming out, with these key levels still holding, EUR/USD 1.1762 and GBP/USD 1.3053. The dollar index also found support near 92.00, as the dollar has been on a losing streak since May, markets will be watching closely to see if it can maintain this support.
US markets are closed today for the labour day holiday in the states. The focus this week will be on NFIB small business optimism on Tuesday and then the CPI figures on Friday. CPI should have less of an effect on markets than it did before due to Powell’s new strategy of allowing inflation to surpass the previous target of 2%.
Last week saw some poor data out of the Eurozone with both CPI and retail sales missing their forecast. Most notably, retail sales forecast at 3.5% was confirmed at 0.4%, giving further evidence of the struggles the European economy is currently facing. This led to the euro weakening at the back end of the week after hitting a fresh 2 year high against the dollar on Monday at 1.2011. A second wave of cases of COVID-19 has continued to trouble both France and the Netherlands, this will weigh on the euro.
All eyes are on the ECB interest rate decision on Thursday, with noises coming out of the ECB against euro strength the markets will be watching for comments on two topics. The first, how much lower does the ECB revise its 2022 inflation forecast, currently 1.3%. The second, if the ECB mention the possibility of future easing. On Monday, EU GDP for both quarter on quarter and year on year, forecast at -12.1% and -15% respectively.
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