UK unemployment data released but is the economy still insulated by furlough scheme?

· Federal Reserve may offer more stimulus in move which would weigh on dollar

· Bank of England may provide clues over further rate cuts before year end.

The week starts with US Consumer Inflation Expectations. This metric is useful as it provides some forward insight and forecasts suggest that the outlook will remain relatively upbeat at around 3%. Critically this could help drive wage growth.

Tuesday sees UK unemployment data, which includes the release of the August Claimant Count. Expectations are for another 50,000 applicants to be seen, although with the furlough scheme still running, these numbers could still be left looking conservative. With that in mind, a figure much above the forecast could raise fresh questions over the UK’s recovery prospects.

UK Average Earnings for July will also be published, and expectations are for another decline to be posted here. That clearly makes sense given ongoing job losses but weak figures here will end up weighing on inflation and will do little to help Sterling.

Another forward-looking indicator is the German ZEW Economic Sentiment Index for September. Expectations are that economic confidence will help generate a solid reading here, although it may struggle to match August’s high of 71.5.

UK inflation for August kicks off proceedings on Wednesday and expectations are that July’s bounce higher is going to be left looking like an outlier. Critically however, the annualised print is forecast to remain in positive territory, something that policymakers are likely to take comfort in. With the end of the Brexit transition likely to fuel further inflationary pressures in the New Year, some short term weakness here ought not to cause much concern.

Wednesday evening sees the Federal Reserve’s FOMC meeting conclude and expectations are building that policymakers will commit to further stimulus measures. These are likely to fall short of the demands seen from lawmakers on Capitol Hill, but given the stated desire of fuelling inflation, depending on how generous any move is, look for fresh US Dollar weakness – and a possible jump in gold prices as a result.

Thursday sees central bank activity focused on London, with the Bank of England’s latest stance over monetary policy due to be released. With the bank having made it clear that moving to negative interest rates is a possibility, the market will be watching for further clues here. A change this week seems unlikely, but even a hint that another rate cut may be coming soon would be sufficient to hit Sterling – again.

US Housing Starts for August are also set for Thursday and could serve as something of a shock to the prospects of recovery. Meaningful growth for each of the last three months seems set to come to a grinding halt and although there may be a seasonality aspect to this, with the number having hit more than 10 year highs at the start of the year, a slow down here would send a message about a lack of confidence in the broader economy.

UK Retail Sales will round off the week, with the data for August set to be published. The month-on-month figure here has been turbulent over the last six weeks, distorted by the COVID-19 lockdown, so the annualised figure is arguably more representative. Expectations are that this will be around 3%, and closer to 4% once fuel is stripped out. Numbers like that ought to offer some solace that consumer spending – at least for now – is playing a vital role in supporting the economy.

Article by Tony Cross of Monk Communications. This article first appeared in Octo
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