GBP

The pound has begun the week on the backfoot as Brexit concerns intensified over the weekend. Sterling has lost over a cent against the dollar and around half a cent against the euro. Britain and France clashed again on Sunday after a leaked letter revealed French politicians had asked the EU to “punish” the UK for leaving the bloc. After a meeting between PM Johnson and President Macron at the G20 summit in Rome, French sources suggested a deal was in the works to cool tensions over the fishing row. However, this was denied by Downing Street and foreign secretary Liz Truss speaking on Sky news this morning warned that Britain was ready to use the “mechanisms of our trade agreement with the EU to take action”. Separately, EU vice president Maros Sefcovic urged the UK “not to embark of a path of confrontation” over the bloc’s new proposals to reduce checks on UK goods entering Northern Ireland. Looking ahead this week, the Bank of England will start their 2-day policy meeting on Wednesday.

EUR

On Friday, the euro erased all the gains it had registered against the dollar after the European Central Bank meeting on Thursday. ECB policymaker Robert Holzmann repeated that he expects inflation to be temporary but warned that the central bank needs to be flexible. This morning, data released showed that German retail sales contracted by 2.5% month on month in September, missing market expectations by a wide margin.

USD

The dollar has been supported on growing expectations that the Federal Reserve Bank will be forced to adopt a more aggressive policy response to contain stubbornly high inflation. These speculations were further fuelled on Friday when the Core PCE index, the central bank’s preferred inflation gauge, held steady near 30-year highs in September. Markets are now pricing in that the Fed could now raise rates as early as mid-2022. Monetary policy in the US is in sharp focus this week, with the Federal Open Market Committee widely expected to announce a tapering of pandemic stimulus on Wednesday.

Economic Calendar

2.00 pm US Manufacturing Employment index
2.00 pm US Manufacturing PMI