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Conference season ramps up, sterling volatility expected to follow

By Hamish Muress

The party conference season has kicked off with the Liberal Democrats and Vince Cable getting things rolling. This is the first conference of many with both the Tory Party and Labour Party expected to create headlines and fireworks. Normally conference season passes without too much attention, however with the Conservative government having a minority within Parliament and Brexit plans being examined constantly this season could cause some volatility for the pound. Not wishing to miss out on all this upcoming drama, London Mayor Sadiq Khan called for a second referendum over the weekend on the outcome of the Brexit deal. Expect more of this over the coming weeks as well Boris Johnson’s possible leadership bid.

In the meantime UK inflation is released this week which could cement the Bank of England’s position on interest rate hikes. For a next hike in 2019 inflation will have to consolidate around the 2% mark, the Bank of England’s target, if wage growth is still subdued.

Ahead of next week’s Federal Reserve meeting, where the central bank is expected to raise their interest rates once more, this week could be relatively subdued for the US markets and the US dollar. There isn’t much data out from the US this week but the markets will be watching for any news around US/China trade negotiations. This is the week where the US is expected to implement further tariffs on $200 billion worth of Chinese imports creating a new deadline for the negotiations. In terms of the Federal Reserve the market is currently pricing in around a 95% chance for rates to be raised to 2-2.25% further widening the gap with the ECB.

Speaking of the ECB, they recently reaffirmed their plans to reduce its asset purchase programme to €15 billion per month in the last quarter of the year, finalising the unprecedented programme by the end of the year. There was good news out of Italy this morning as a report apparently from Italian Finance minister Giovanni Tria that the budget deficit from the upcoming budget will be around 1.6%, below the ECB’s ceiling of 2%. This has seen a mini rally in Italian bonds and it may seem that for the time being at least the risks out of Italy are off the table.

Wednesday marks the start of meetings amongst EU leaders and Brexit is set to be one of the topics of conversation with Michel Barnier expected to be granted more flexibility.

Tuesday will mark the first set of minutes from the RBA since Westpac decided to raise the rates on their variable mortgages, something that caused a selloff in the Aussie Dollar. Tuesday will hopefully reveal the central bank’s outlook although they may now be less willing to raise rates over the next 12 months.

Tuesday, Thursday, Friday – its non stop for the Canadian dollar this week with the release of manufacturing sales, jobs data, retail sales and inflation. This all unfolds at the same time as NAFTA negotiations which continue to move along at a glacial pace despite some false starts. For the time being it appears that Trump is willing to drag his heels on trade negotiations with both Canada and China ahead of US mid-term elections.

GDP data is set to be released for New Zealand on Wednesday. But with quarterly growth missing expectations four out of eight times since September 2016 the risks to the New Zealand dollar continue to be to the down side.