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UK marginally dodges a recession bullet

GBP - British Pound

The UK breathed a sigh of relief yesterday after talks of a Brexit fuelled recession were put to bed, just. Britain's economy did shrink by 0.1% in August, however estimated GDP grew 0.3% in the last three months according to the Office of National Statistics, which counteracted the Brexit uncertainty that was widely touted to push the UK into a technical recession.

The weak figure in August was partly due to the reporting of weak manufacturing data we heard of last week, but the TV and film industry helped boost the service industry which cancelled out the 1.1% contraction in the manufacturing industry. The UK's trade deficit was cut by £13bn to £4.6bn in the three months to August as the country imported fewer goods and services. Annualised, the deficit widened by £18.6bn to £50.4bn.

Over in the US, the Federal Reserve confirmed a new set of rules which will ease capital and liquidity requirements for certain US banks. Large US banks will be now put into four categories based on their size and other risks. Domestic banks with under 700bn USD in assets would enjoy a degree of relaxed rules. This is the first time since the financial crisis of 2008 that the Dodd-Frank laws have modified.

The ongoing Brexit saga took a turn for a potential better yesterday when the Irish Taoiseach Leo Varadhkar and UK PM Boris Johnson had productive one to one talks for three hours. They released a joint statement stating that 'they could see a pathway to a possible deal' and that this could be 'done by the end of October.'

The pound jumped almost 2% to a high of 1.2440 and overnight, headed as high 1.2470, some of sterling's biggest gains in 6 months. However, the currency remained in an air of caution after earlier in the week, Number 10 and public statements from Dublin stated that a deal in the current deadline is 'very difficult'.

Key Movers

Focus remains on Brexit negotiations into next week. There are a number of deadlines that have been branded about, and there could significant volatility on these days. Brussels has stated that a compromise must be confirmed by the end of this week if a deal is to be agreed by next Thursday at the European Council. Downing Street is under the impression that they have until the end of Monday. European Council president Donald Tusk is expected to draw up the agenda for the summit early next week.

Johnson has announced an extraordinary parliamentary sitting session for MP's on Saturday 19th October, the day after the European council concludes. The law stipulates that if a deal isn't secured, Johnson must seek an extension to Article 50 to avoid a no-deal.

Yesterday's talks between Johnson and Varadkar are very positive, and Varadkars comments that he is convinced Johnson wants a deal, also provides the market with comfort that we won't crash out at the end of October without a deal. Stephen Barclay, the Brexit secretary, sits down with Michel Barnier for formal talks today. Barnier wouldn't have agreed to said talks unless progress had been made. This is also pointing to a possible sterling strength in the coming days, however brakes could be put on the positive news if a deal can't be secured in the deadline. Market commentators believe that the most likely outcome is that a lose deal maybe secured, but that the October 31st deadline would have to be extended anyway, given the little time left. Alternatively, if a deal isn't agreed, Johnson will ask for a short extension and push ahead for a General Election with the manifesto to then push for a harder Brexit. Whatever the outcome, next week is a critical one for the pound and volatility could be rife.

Comments from Nissan's European chairman bought home the real life impact of Brexit and a possible no-deal scenario. Tariffs introduced in the wake of a no-deal Brexit would make Nissan's business model in Europe unsustainable and put the future of its Sunderland plant in jeopardy. One in three of the 1.5mn cars Nissan produced in Britain last year was produced in Sunderland, which supports 30,000 jobs. Under WTO rules, tariffs of 10% would have to be applied to vehicles.

Expected Ranges

GBP/USD: 1.2420 - 1.2510 ▲

GBP/EUR: 1.1280 - 1.1340 ▲

GBP/AUD: 1.8240 - 1.8420 ▲

GBP/CAD: 1.6530 - 1.6710 ▲