Brexit endgame nears as series of summits begins

By Padraic Halpin

DUBLIN (Reuters) - Brexit talks are set to intensify over the coming week, with the first of three summits that European Union leaders hope will settle a divorce deal for departing Britain within the next two months.

EU leaders will get an update on negotiations in Austria on Thursday and also decide whether to hold a special summit on Brexit in November, now that they no longer expect to clinch a deal at their regular gathering scheduled for Oct. 18-19.

The timing of the meetings tallies with EU Brexit negotiator Michel Barnier's suggestion that an exit deal could be struck in six to eight weeks if negotiators are realistic in their demands.

Either way, the Brexit endgame is approaching, and the next two months of EU diplomacy will go a long way to determining how orderly Britain's March 2019 withdrawal will be and what kind of economic impact it and its neighbours may face.

While comments from Brussels have buoyed hopes that it and London can reach a divorce deal in time, there are still serious concerns over whether they can agree on a way to prevent any return to a hard border on the island of Ireland.

The tone from the European side will be closely watched in Austria where, according to a senior EU diplomat, Barnier may seek further guidance from leaders regarding the terms of Britain's future trade relationship with the Union.

"There is little clarity about whether this will involve a change in substance or if it is a change in tone/ language," economists at Credit Suisse wrote in a note, reflecting the difficulty in judging progress that has sparked hour-to-hour volatility in sterling in recent days.

The final rounds of negotiations will also determine what the Bank of England does next, with most economists polled by Reuters not expecting interest rates to rise again until after Britain's exit.

The BoE reiterated when it kept rates on hold on Thursday that future moves would depend heavily on how households, businesses and financial markets reacted to Brexit.

WEAKER EURO ZONE PMI

The European Central Bank also kept its policy unchanged as expected when it met on Thursday, staying on track to end bond purchases this year and raise interest rates next autumn.

The bank made small cuts to its growth forecasts for this year and next, citing weaker foreign demand, and noting external risks such as rising protectionism and financial market volatility.

It now expects growth of 2 percent this year and 1.8 percent next, slightly lower than its previous forecast of 2.1 percent and 1.9 percent, tweaks that are likely to be borne out in flash purchasing managers' index (PMI) readings for the euro zone due out on Friday.

"The problems in emerging markets and the unresolved trade conflicts give little hope for an imminent end to the weakness of the euro zone manufacturing sector," Commerzbank economist Christoph Weil wrote in a note.

"Anything but a further decline in the manufacturing PMI in September would be a positive surprise. The service sector remains the driving force behind the economy."

With monetary policy decisions in the coming week from Japan and Switzerland likely to be uneventful, a swathe of housing market and PMI surveys in the United States should also do little to change expectations that the Federal Reserve will raise interest rates when it meets the following week.

The U.S. central bank has raised rates twice in 2018 and traders also anticipate that the Fed will increase them for a fourth time this year in December.

"It does not look like that the Fed will pause in its rate hiking cycle anytime soon," Commerzbank's Bernd Weidensteiner said.