The recent regional election results in Bavaria were a disaster for the Christian Social Union party, who experienced their worst result since 1954. The Social Democrats didn’t fare too well either, with their vote halved and the party coming in below the far-right Alternative for Germany. Surprising as the results were, it is the latest in a long line of populist parties across Europe receiving levels of support not seen for some time.

As the eurozone’s third-largest economy, Italy’s situation is arguably the biggest threat to Europe, with the rise of anti-immigrant party Lega.Lega’s leader, Matteo Salvini, has already clashed with Brussels over Italy’s budget plans and his anti-immigration policies, but support for him and his party has almost doubled since the elections in March.Perhaps most worrying of all is the fact that Salvini has joined forces with Steve Bannon in an attempt to spread his politics across Europe.

In France, the far-right threat has diminished for now, with Emmanuel Macron emerging victorious in the French presidential elections.However, it would be remiss to forget that Marine Le Pen and her Front National party captured 21.3% of the vote in the first round. At the head-to-head stage, Le Pen secured 33.9% which equates to 10.6 million votes.

Hungary should get a mention, as they already have a far-right leader in power. Prime Minister Viktor Orban has systematically undermined judicial independence in the country over the past few years, and has also limited the freedom of the press. The rise of the far-right is not something that is likely to go away soon and the threat these parties pose to the EU as a whole could have significant repercussions in the not-too-distant future.

Italian budget: Towards the end of September, Italy’s decision to increase public spending despite being in mountains of debt risked the ire of Brussels. Italian markets suffered heavy losses as a result of the government’s decision to agree a 2019 budget deficit target at 2.4% of GDP. However, less than a week later, the markets staged a recovery as Italy backed down in its row. It appeared that all might be well. Then, the European Commission President, Jean-Claude Juncker, hinted that Brussels will reject Italy’s plans. Juncker said that there was a gap between what Rome has promised and what it presented to Brussels. The outlook does not look good at present and there could be some fireworks to come.

Eurozone economy: In September, we learned that the eurozone’s economy was slowing slightly, with GDP increasing at an annualised rate of 1.5% in the second quarter of 2018. It was the second successive quarter that trade fears have weighed heavily on economic growth and we might not yet have seen the full effects. In 2017, trade was a vital part of the eurozone’s economic recovery, so it follows that any traderelated issues were always going to have a significant impact on growth. Business confidence has been affected in Germany and across the eurozone, and it will be interesting to see what the GDP figures for the third quarter of 2018 are.

Brexit: Given that we reside in the UK, it is understandable that the headlines are dominated by the impact of Brexit on our economy. However, if there was a no-deal Brexit (which is looking increasingly likely), countries in the EU would certainly be affected too. If Britain ends up adopting WTO rules, then growth across Europe would almost certainly fall and, while the UK would be affected the most, there would be economic pain across Europe. The next few months are important for both sides of the negotiating table.

With just over five months now until the UK withdraws from the European Union, it is imperative that more is done to agree a deal in the immediate future. At the start of October, the Dow Jones reported that a Brexit divorce deal could be agreed within a week, but that proved to be wide of the mark. Investors have repeatedly jumped on any signs of a breakthrough, but when details have failed to materialise, they have sold sterling. That explains why the pound has been extremely volatile of late, with no signs of calmer waters anytime soon.

Brexit: It is clear that the UK’s withdrawal from the EU will be the chief economic factor to look out for in the next quarter and probably beyond that too. Since the UK formally triggered the Brexit process by giving notice under Article 50 of the Lisbon Treaty, the pound has suffered more than a 20-cent GBP/USD swing between the highs and lows and almost a 13-cent GBP/EUR swing. A raft of British businesses have issued hard Brexit warnings, but we’re still no closer to agreeing a deal. We should always bear in mind that any economic impacts that have come about since the UK voted to withdraw
from the EU are not the full story; we will only begin to get a real sense of the impacts when we have officially left.

UK economy: The UK economy failed to grow in August which was worse than
the paltry 0.1% growth economists had forecast. On the same day, the International Monetary Fund reported that the UK’s public finances are among the weakest in the world, with only Portugal being in a worse state. We are now firmly into the final quarter of the year, but we will have to wait until 9 November to see the preliminary estimate of the UK’s GDP growth rate for the third quarter of 2018. Last time around, the year-onyear figure was 1.2% and some are already predicting a nudge up to 1.4%. That would certainly be welcome news, but as with all things of this nature, we will have to wait and
see what the actual figure is.

Inflation: On 19 September, we learned that the UK inflation rate in August jumped to 2.7% from 2.5% the previous month. It was the highest mark for six months and analysts had actually expected a dip to 2.4%. The year-on-year rise in CPI in August meant that the gap between inflation and wage growth was narrowing which put pressure on UK households. However, we have since learned that wage growth rose by 3.1% in the three months to August – the highest pay growth in almost a decade. The day after, new inflation figures showed a drop to 2.4% in September. Not only will this ease the cost of
living burden, but it could convince the Bank of England to delay a rate hike. It will be interesting to see how inflation fares in the last three months of 2018.

The pound reversed its early losses against the dollar and the euro on Wednesday, jumping sharply after the UK and German governments appeared to soften their respective demands for a Brexit deal.

Earlier, sterling had fallen as much as 0.4 per cent against both the dollar and the euro after new data revealed business optimism has fallen to a five-month low, largely due to concerns over the UK’s EU departure.

The pound shot up to $1.30 against the dollar from an earlier low of $1.28 and briefly spiked to €1.12 before settling back to €1.11.

The big movements in the currency markets came on the back of reports that both the UK and Germany are willing to accept a less detailed agreement on trade in a bid to get a deal completed by March and avoid a cliff-edge Brexit.

in less positive news for sterling, the Purchasing Managers Index for UK services in August came in better than expected at 54.3 in the month, up from 53.5 in July (any figure above 50 signals expansion).

However, the reading for business confidence declined to one of its lowest levels since the 2016 EU referendum, with the Chartered Institute of Procurement & Supply, which sponsors the PMI survey, noting anecdotal evidence that Brexit uncertainty continued to hold back business-to-business spending, especially in relation to large-scale projects.

“Though the sector remained in positive territory, the dark clouds of political indecision are still having an effect and preventing more business activity.

“Service providers are likely to continue along this vein for the rest of the year until those clouds have cleared,” said Duncan Brock of the CIPS.

Chris Williamson, chief business economist at IHS Markit, said the findings pointed to further gloom in the future.

“Given the increasingly unbalanced nature of growth and the darkening business mood, risks to the immediate outlook seem tilted to the downside,” he said.

Meanwhile, Fiona Cincotta, a senior market analyst at City Index, said: “Normally the weaker pound would have helped some major FTSE companies gain ground but instead the FTSE index weakened amid a general worsening of the market mood with trade concerns and Brexit worries lingering in the background.”

The FTSE 100 was down 0.42 per cent in early afternoon trading.

THE pound euro exchange rate has managed to find firmer ground ahead of the long bank holiday weekend after dropping half a cent yesterday in reaction to the government’s no-deal Brexit papers. So far today the pound euro exchange rate has been lingering around the day’s opening levels of €1.109.

Yesterday’s “worst-case scenario Brexit” plans were released to inform consumers and businesses about how to prepare for a no-deal split.

Despite UK Brexit Secretary Dominic Raab stating in an accompanying speech that the papers would be “rendered redundant” if the UK and EU came to an agreement, Sterling still saw a sharp decline.

Scotland’s First Minister Nicola Sturgeon stated in a heated tweet that a “no deal Brexit would be an unmitigated disaster – and the fact that UK [government] is even talking about it is evidence of their abject failure”.

Nevertheless, politicians seem hopeful that a deal is likely, with negotiations currently ongoing.

Economists were anticipating a chance of the pound making some headway this morning courtesy of the UK’s mortgage approvals numbers for July, but the figure fell short of expectations at just 39.584k, despite a forecast of 42.5k.

While this hasn’t noticeably impaired GBP this session, it’s likely that any impact this data would have had has been overshadowed by intensifying Brexit jitters.

On the other side of the pairing, the euro made progress yesterday thanks to the latest Eurozone PMI’s, which forecast growth in the bloc to have remained steady in August.

However, this was tempered by a less optimistic outlook for future growth due to this month boasting one of the lowest rates of expansion seen in the bloc of late.

It came as company optimism fell to its lowest rate in almost two years due to current geopolitical and economic instability.

This, along with this morning’s lacklustre German GDP figure for the second quarter, has seen the pound euro exchange rate trade within a narrow range so far this session.

Looking ahead, both currencies may struggle today, with the session marked by a noticeable absence of UK and Eurozone data, which could see the pairing fluctuate as investors eye Brexit developments and the ongoing trade spat for signs of instability.

Monetary policy committee lifts cost of borrowing to highest level since 2009.

The Bank of England has raised interest rates above the emergency level introduced straight after the financial crisis, despite mounting fears about the economic impact of Britain crashing out of the EU without a deal.

Signalling the gradual return of higher borrowing costs, Threadneedle Street raised interest rates to 0.75% from 0.5% – the level they were dropped to in March 2009 as the economy lurched through the last recession.

The Bank’s nine-member monetary policy committee voted unanimously for the increase, judging the economy had bounced back from a soft patch earlier this year triggered by the freezing weather and heavy snowfall from the “beast from the east”.

While warning Brexit could blow the economy off course, the MPC said recent readings for economic growth “appear to confirm that the dip in output in the first quarter was temporary, with momentum recovering in the second quarter”.

The rate setters added that if the economy continues to recover as forecast, an “ongoing tightening of monetary policy” – meaning more interest rate rises – would be required to return inflation towards the Bank’s 2% target over the next few years.

Having made the call to move interest rates for only the third time in the past decade, the Bank’s latest decision comes amid growing fears over Brexit, with Theresa May facing parliamentary divisions over her plan.

Raising interest rates will mean higher borrowing costs on mortgages and loans for hard-pressed consumers and businesses as they adapt to Britain leaving the EU.

An extra 0.25% interest will add £12 a month to a £100,000 repayment mortgage and £25 on a £200,000 loan. However, nearly 70% of homebuyers have fixed-rate mortgages, so will be unaffected.

Some economists had urged the Bank to keep rates on hold to help support jobs and growth amid the uncertainty.

Mark Carney, the Bank’s governor, had previously said it could use an emergency rate cut in the event of no deal. While Threadneedle Street has a mandate to steer inflation towards 2%, it can deviate to support the economy through difficult periods.

However, factory output has slowed amid softer global economic growth, as Donald Trump has slapped import tariffs on some of the US’s biggest trading partners, including the EU and China. Despite the low levels of unemployment in the UK, pay rises for British workers also remain elusive.

But in giving its verdict for higher rates, the MPC said it believed wages should begin to rise over the next three years, helped by the low levels of unemployment, while economic growth should average around 1.75% per year.

Factors to Watch in Europe

The eurozone’s economy hasn’t performed quite as well as expected in 2018, with many stating that the economic forecasts made at the turn of the year were a little too optimistic. However, the situation has been exacerbated by the ongoing trade dispute with the Trump administration and in recent weeks has become even worse, with Trump threatening to impose tariffs on
European car imports. While those tariffs are yet to materialise, the eurozone’s economy is already taking a hit.

What to look out for:

Trade war:

When the European Union cut its eurozone growth forecasts, it was the clearest sign that the ongoing trade disputes with the Trump administration were having a significant impact on the European economy. At the time of writing, there are only tariffs on steel and aluminium imports, but Trump’s threat to impose tariffs on European car imports has rattled the European Commission. Business confidence has already been affected, but if Trump moves ahead with his plans, the global economic recovery could be disrupted.

Political and policy uncertainty:

At the start of June, Giuseppe Conte was sworn in as the prime minister of the new Italian populist government. While Conte assumes the role of the most powerful office in Italy, it is the leaders of the right-wing League party and the anti-establishment Five Star Movement who will likely call the shots. It is of some concern that the new government is eurosceptic and has promised a spending and tax-cutting binge. We could be heading towards a new European crisis which would rattle investors and the eurozone as a whole.

Monetary policy normalisation:

On 14 June 2018, the European Central Bank stunned the markets by announcing it would halve the pace of its quantitative easing programme to just €15 billion per month after September. More surprising still, was the decision to stop buying any new bonds from December. Ultimately, this means that the ECB has decided there is no longer a need for an ultra-loose monetary policy. However, Mario Draghi has insisted that interest rates will not be increased until at least the middle of next year. It is possible that Draghi could leave his position as president of the ECB without ever having increased interest rates.

Brexit:

Brexit has already had a negative impact on the UK economy, despite the fact that Britain will not be leaving the EU for another eight months. The uncertainty surrounding the government’s plans and what the EU will make of them has led to some significant swings in the value of the pound. British business leaders are understandably worried about the lack of certainty, with Jaguar Land Rover warning that its £80 billion UK investment plan is at risk if the UK leaves the EU single market.
Theresa May recently managed to defeat a Commons rebellion and her position has been bolstered as a result. It will be hoped that the UK and EU reach an agreement sooner rather than later.

The UK economy:

The economy received a boost when UK growth for the first quarter of 2018 was revised up. The Office for National Statistics had estimated that the UK
economy grew by 0.1% in the first three months of the year, but the final reading was 0.2%. In July, ONS issued its first ever monthly GDP reading, which showed that UK GDP increased by 0.3% in May. While this is welcome news, it served to highlight how imbalanced the UK economy currently is. For, while the services sector posted impressive figures, construction and manufacturing both shrank. It will be interesting to see what the next few monthly readings show.

Interest rates:

When the first monthly UK GDP reading was released, it fuelled speculation that the Bank of England will increase interest rates in August. However,
since then wage growth has slipped to its weakest level in six months. That alone was unlikely to dampen expectations of an August rate hike, but when inflation held steady at 2.4% in June, the chances greatly diminished. The pound tumbled to its lowest mark against the dollar since September 2017 and it makes for a fascinating run up to the rate decision announcement

Credit: Smart Currency Business July-September Forecast 2018

The pound to Euro exchange rate has been struggling under the increased uncertainty arising from Brexit. This issue has been the biggest driver of the pairing for the last 2 1/2 years, this doesn’t look like it will be changing soon either.

The pain for those buying Euros with Pounds looks set to continue, with the strength and weakness of sterling being directly linked to how the market views the UK government’s performance.

Today is UK Inflation data and tomorrow Retail Sales which will provide us with further insight into just how the UK economy is performing, yesterday’s UK Unemployment data did suggest perhaps the UK labour market is not quite as strong as many had predicted.

For clients buying Euros the Inflation data and Retail Sales data could present a short term opportunity which might be well worth capitalising on. With Brexit as the main market driver looking set to reap further misery for anyone holding the Pound, clients with a Euro purchase should, I believe be adopting more of a defensive position.

Further uncertainty in Mrs May’s Government could see the Pound under pressure and struggling to retain form. Whilst the prospect of an interest rate hike next month could present opportunities, we would not be expecting a major rise in the value of Sterling since this news is largely priced in.

It is not completely priced in however, since there is a mixed chance of an interest rate hike at the next decision, potentially around 60-75%. However, the enthusiasm that would find itself behind the Pound if the Bank of England do raise seems limited since political concerns are the main factor, these seem unlikely to be resolved quickly.

The Pound made gains against the Dollar and Euro on Tuesday after the latest IHS Markit PMI showed the UK’s construction industry finally turned a corner in June, with the index of activity in the sector rising at its fastest pace for eight months.

The IHS Markit Construction PMI rose to 53.1 in June, which is up from 52.5 in May, when economists had looked for the index to rise to just 52.6.

Both residential and commercial construction sectors saw a notable upturn in activity during June and the outlook for the months ahead also brightened too, with new orders rising at their fastest pace in more than a year while input buying increased at its fastest pace for two and a half years.

Job creation in the sector picked up during the month while companies responding to the IHS Markit survey reported faster input buying was the result of the increase in new work, as well as forward purchases designed to get around forthcoming materials price rises. Materials prices rose at their fastest pace for nine months in June.

Business optimism about the future also saw a recovery during the recent month, supported by an increase in infrastructure project work, which is flagged to be a key source of growth for the industry in the next 12 months.

“The pick-up in the construction PMI in June indicates that the sector no longer is in retreat, but the near-term outlook remains bleak. The average level of the PMI in Q2 is consistent on past form with output merely holding steady, having dropped by 0.8% quarter-on-quarter in Q1,” says Samuel Tombs, chief UK economist at Pantheon Macroeconomics. “As a result, we think it’s still too soon to be looking for the construction sector to support GDP growth.”

Bank of England in Focus

The first-quarter economic slowdown, and a steep decline in UK inflation, led the Bank of England (BoE) to abandon the idea of an interest rate rise in May. This dented the Pound and left markets looking to the August meeting for the next possible move.

“I would have voted to raise Bank Rate at the MPC’s May meeting had data on the economy held firm. What we saw ahead of that meeting was a string of weak data suggesting consumer spending might be faltering,” says Andy Haldane, chief economist at the BoE and a member of the Monetary Policy Committee (MPC), in a speech last week. “I believed there was option value in waiting to see if these data signalled the start of a lasting retrenchment by households, or were instead a temporary snow or statistical blip.”

Haldane was one of three MPC members to have voted in June for an increase in the UK’s main interest rate, after eschewing such a decision in May. Many economists now expect the Bank of England will go ahead and raise rates in August, although financial markets have been slow to take note.

Sterling-Overnight-Index-Average pricing on the morning of Thursday 28 June implied and August 02 Bank Rate of 0.59%. If markets were as confident in the likelihood of an August rate rise as Andy Haldane appears to be in the merits of one then that implied rate would be closer to the 0.75% the actual Bank Rate will sit at the next time the BoE pulls the trigger.

If and when financial markets become more willing to bet on an August interest rate rise then this implied rate will rise further, and the Pound with it.