UK Growth Figures, US Inflation and French Protests: Sterling Update

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Sterling faces a busy week, with UK monthly activity figures and a series of Bank of England speeches likely to shape expectations for interest rates. Meanwhile, the euro remains under pressure from political uncertainty and protests in France and Spain, while markets await the latest US inflation data for clues on the Federal Reserve’s next move.

The International Monetary Fund’s latest global economic forecasts will also be in focus, with concerns over weak growth, rising borrowing costs and geopolitical tensions weighing on the outlook. Across North America, comments from the Bank of Canada and continued pressure on the Mexican peso add to a packed week for currency markets.

UK monthly activity figures in focus, alongside Bank of England speeches

This week sees the release of UK monthly activity figures for August on Thursday, alongside a series of Bank of England speakers throughout the week.

The case for a further increase in official interest rates continues to centre on inflationary pressures, although there remain limited signs that these pressures are being driven by the domestic economy.

Sterling remains under pressure against the US dollar but continues to hold up well against the euro. This divergence appears to be driven more by developments in those economies than by domestic UK factors.

One additional area of interest is today’s parliamentary debate on rejoining the European Union. However, this is unlikely to alter the UK’s position on EU membership in the near term, in my view.

IMF forecasts to offer few crumbs of comfort

The International Monetary Fund (IMF) will release its full global economic report this week, following earlier warnings about rising debt servicing costs.

The report, due on Tuesday, is unlikely to offer much relief to financial markets, given weak global growth, geopolitical tensions and further increases in government borrowing costs.

There could be downward revisions to growth expectations across the UK, the euro area and North America.

US CPI figures for September in focus this week

This week is likely to see considerable attention focused on the US consumer price index (CPI) inflation figures for September, due on Wednesday.

Markets will be watching to see whether core inflationary pressures have picked up or whether inflation remains largely concentrated in more volatile headline components such as energy, fuel and food.

Producer price index (PPI) figures, industrial production data and Federal Reserve staff projections are also due this week. However, alongside the CPI figures, comments from Fed officials are likely to attract the greatest attention.

Will the Fed argue for a further immediate increase in interest rates, or are concerns about parts of the US economy sufficient to keep policymakers on hold at their meeting at the end of October?

In my view, US dollar strength may prove another factor arguing against an additional rate increase at this month’s meeting.

Energy markets could also remain in focus, as renewed tensions in the Middle East and recent comments from President Trump regarding a possible energy ceasefire between Russia and Ukraine add another layer of uncertainty to the inflation outlook.

ECB speeches and political uncertainty to determine euro direction

The European Central Bank (ECB) appears to be preparing markets for another interest rate increase, potentially as early as the Governing Council meeting at the end of October.

Speeches last week indicated that several ECB officials believe acting sooner could provide a credibility boost to their efforts to tackle inflation, although I would question that assessment.

This week brings further appearances from policymakers, including Lane and Schnabel. Schnabel is also in focus as the candidate list for her Executive Board position closes the day before the ECB Governing Council decision.

There is also likely to be significant interest in developments in Spain and France, where protests showed little sign of easing over the course of last week.

Unless these political disruptions begin to ease, pressure on the euro could increase as downside risks to growth continue to build, in my view.

Bank of Canada speeches dominate as Mexican peso remains under pressure

Monetary policy signals from the Bank of Canada (BoC) will come primarily through three speeches this week.

Governor Tiff Macklem is scheduled to speak on Wednesday, 14 October, and Friday, 16 October, while Deputy Governor Carolyn Rogers is due to speak on Thursday, 15 October.

Ahead of the Bank’s late October rate decision, markets will focus on how policymakers interpret the latest economic data, particularly employment and activity figures. The Canadian dollar could weaken further if it appears unlikely that the BoC will sanction a rate increase.

In Mexico, last week’s inflation and vehicle production figures have added to pressure on the peso.

The Bank of Mexico has left interest rates unchanged for several months, and recent data suggests it may need to consider reducing rates, despite several other central banks continuing to debate further tightening.

Peso weakness could therefore continue this week, with little on the economic calendar, or in diplomatic developments around trade and border tensions, likely to alter the prevailing direction of travel.

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