-    Autos may have helped US retail sales grow strongly in August (13.30 BST)-    Euro-zone employment probably stabilised in July (10.00 BST)-    Indonesia unexpectedly raised interest rates to defend the rupiah  Key Market Themes Sterling is the best-performing major currency against the dollar since the start of July and is now at a six-month high of about $1.58, helped by a rise in interest rate expectations and a better economic outlook. Yet only two months ago, investors feared an imminent sterling crisis. At the time, we thought these concerns were overblown. (See our Global Markets Update, “Too soon to write off the pound,” published on 8th July.) However, the sharp appreciation in the currency over the summer looks overdone and we think sentiment has now swung too far the other way.   As Chart 1 shows, the gap between expected short-term rates in the UK and US economies has risen recently, despite the forward guidance announced by the UK’s MPC in August, and this has been accompanied by a rise in sterling. But we do not expect this to be sustained given the relative outlook for monetary policy in the UK and the US. We think that the UK MPC will keep interest rates on hold until 2017 and may even restart quantitative easing. (See our UK Economics Weekly, “What will the MPC do next?”, published on 2nd September.) By contrast, we expect the Fed to announce a reduction in its bond-buying programme next week and forecast that the fed funds rate will rise to about 1% by the end of 2015.   If we are right, then overnight interest rate expectations in the UK are likely to fall back relative to those in the US, which could well drag down sterling. Nonetheless, monetary policy will probably remain exceptionally very stimulative in both countries for an extended period, which should cushion any fall in the pound.   The pound has also benefited from an improvement in the prospects for the UK economy and a steady stream of better-than-expected economic data. However, while the outlook for the UK is arguably much brighter than it was, the recovery does not appear to be as strong as in the US. We forecast the UK economy to expand by 1.2% this year and 2% in 2014, compared to growth in the US of 1.5% and 2.5% respectively. (Our 2015 forecast is 3% for both economies.) Therefore, the relative growth outlook for the two economies is more likely to favour the dollar rather than sterling.   Accordingly, even though the pound is now some way above our year-end forecast of $1.50, we expect it to fall back over the coming months. (Jessica Hinds)   What to watch today: US August’s producer prices release ( 13.30 BST) is likely to show that there are hardly any price pressures in the goods inflation pipeline. Headline PPI inflation may have fallen to 1.0%, from 2.1% in July. Energy price effects are likely to have weighed on overall producer prices again. Meanwhile, another subdued rise of 0.1% m/m in core prices wouldn’t be enough to prevent overall prices from falling by 0.1% m/m.   A leap in auto sales is likely to have been the main factor behind a solid 0.6% m/m increase in retail sales values in August ( 13.30 BST). But underlying sales growth may have been fairly healthy too. We think auto sales alone could boost overall retail sales by 0.5 percentage points. We are expecting that both gasoline station sales and building materials sales increased by around 0.5% m/m last month. So a 0.3% rise in sales of all other items should translate into a 0.6% m/m increase in overall sales. (Paul Dales)   Although there are conflicting signs in terms of which direction the University of Michigan’s consumer confidence index ( 14.55 BST) will move in September, we suspect that there is more of a downside risk than an upside one. We have forecast a slight drop to 81.0 in September, from 82.1 in August. (Amna Asaf)   Continental Europe Euro-zone employment ( 10.00 BST) probably stabilised in Q2, but a meaningful recovery remains a distant prospect. We know that unemployment rose by a further 115,600 in Q2, pushing the unemployment rate up to a record high of 12.1%. If we assume that the workforce expanded modestly (in line with the recent trend), it appears likely that employment fell by roughly 0.1%. Although this would leave the annual growth rate at about -0.9%, it would have been the smallest fall since Q2 2011. Looking further ahead, survey data suggest a continued, if very subdued, improvement in the labour market in Q3. (James Howat)   The large fall in euro-zone industrial production in July (published on Thursday) put a serious dent in hopes that the tentative recovery underway in the region’s economy will have gathered further momentum in the current quarter. The 1.5% monthly fall was much worse than the published consensus forecast (-0.3%), although expectations would have been revised down following the disappointing national figures published earlier this week. July’s fall means that, even if industrial production posted monthly rises of around 1% in August and September, it would still roughly stagnate in Q3 as a whole, after rising by a downwardly-revised 0.6% in Q2. (Ben May)   UK Data on construction output ( 09.30 BST) in July is likely to show the sector getting off to a good start in Q3. With a recent strong run of survey data, increasing evidence that the recovery in the housing market is spurring house building and some evidence of a relaxation of the squeeze on public sector activity, we think construction output could rise by 2.5% m/m in July. (Martin Beck)   Meanwhile, there wasn’t a great deal to report from the testimony of Mark Carney and some other MPC members to the Treasury Select Committee. Much of the time was explaining the various “knockouts” to the Committee – underlining that one of the reasons why forward guidance may not have had a bigger impact so far is its lack of simplicity. David Miles and Paul Fisher both still sounded pretty dovish, but we will have to wait for next week’s MPC minutes to see whether either of them actually resumed their voted for more QE at this month’s meeting. (Vicky Redwood)   Japan Core machinery orders were unchanged in July after falling by 2.7% m/m in June. (Data released on Thursday.) This was slightly weaker than the consensus but this is a volatile series and the gradual upward trend is probably still intact, consistent with a further pick-up in investment spending in Q3. (Julian Jessop)   China No major data or events scheduled for today.   Other Asia-Pacific Bank Indonesia (BI) on Thursday unexpectedly increased its main policy rate and the Fasbi rate by 25bp in order to defend the rupiah. We had expected rates to remain on hold. After all, BI had only hiked rates two weeks ago at an emergency meeting. In the last few days though, the rupiah has continued to weaken, even though most other emerging market currencies have rebounded. Elsewhere, central banks in New Zealand, Korea and the Philippines all left interest rates on hold, as expected. (Gareth Leather)   Other Emerging Markets We expect the Central Bank of Russia (CBR) to cut its benchmark interest rate by 25bps at its meeting on Friday. Although inflation remains above the CBR’s target range, it has fallen in recent months. What’s more, we think that the CBR is likely to concentrate on Russia’s struggling economy. Russia entered recession in the first half of the year, and July’s data showed that growth remained extremely weak at the start of Q3. (Liza Ermolenko)   Key Data and Events Fri 13th      -     Rus   Interest Rate Announcement             00.00   Per   Interest Rate Announcement             05.30   Jpn   Industrial Production (Jul Final)             06.00   Spr   Retail Sales (Jul)             07.00   Fin   CPI (Aug)             08.30   Swe   GDP (Q2 Final)                09.30   UK    Construction Output (Jul)                 10.00   EZ    Employment (Q2)               12.30   Pak   Interest Rate Announcement             13.30   US    Producer Prices (Aug)             13.30   US    Core Producer Prices (Aug)             13.30   US    Retail Sales (Aug)             13.30   US    Core Retail Sales (Aug)             13.30   CA    Capacity Utilisation Rate (Q2)             14.00   EZ    Euro-zone Finance Ministers Meet in Vilnius             14.55   US    Uni. of Mich. Consumer Confidence (Sep Prov.)             15.00   US    Business Inventories (Jul)