Week Ahead (26 October)

W/C Monday, 26 October – EU ETS review negotiations intensify as Irish Presidency and Parliament prepare compromise texts

Negotiations over the EU Emissions Trading System (ETS) review are expected to enter a more decisive phase this week, with both the Irish Presidency of the Council and European Parliament rapporteur Peter Liese (EPP, Germany) preparing their respective compromise texts. On the Council side, a Presidency steering note is expected around 26 October, followed by back-to-back Working Party meetings on 27–28 October, increasing expectations that an initial compromise could circulate during the week, although its precise timing remains unconfirmed. In Parliament, Liese is also expected to advance compromise amendments following the submission of more than 2,700 amendments to his September draft report.

The negotiations follow the politically contentious European Council earlier in October, where several member states pressed for greater flexibility in the ETS and renewed calls to postpone ETS2, the separate carbon pricing system for buildings and road transport, currently scheduled to begin in 2028. The forthcoming texts will be particularly important in clarifying potential changes to the post-2030 linear reduction factor (LRF), Market Stability Reserve (MSR), Article 29a price stability mechanism, free allocation conditionality and industrial decarbonisation support. Although additional flexibility for energy intensive industries appears to have a credible negotiating basis, the more far reaching interventions in allowance supply, advocated by the more pro-industry bloc led by Italy, Poland and Czechia as well as the broader ETS trajectory remain politically contested.

In Parliament, divisions have also emerged within the EPP over ETS2, with amendments from several national delegations seeking postponement until 2031 or outright abolition. However, Liese has pushed back against suggestions of a widespread internal rebellion, arguing that opposition is concentrated in seven of the group's 27 national delegations and one additional MEP, rather than the ten or eleven delegations previously reported. According to Liese, a majority of EPP national delegations continue to support ETS2, although there is broader agreement on the need for rapid adjustments to ETS1 to protect industrial competitiveness and employment. The amendments nevertheless complicate his efforts to build a compromise with S&D and Renew, which also disagree with aspects of his approach, particularly the LRF.

Separately, last week, Council and Parliament reached a provisional agreement to raise the MSR allowance invalidation threshold from 400 million to 700 million. While this preserves additional allowances within the reserve for potential future use, it does not immediately increase market supply or alter the current withdrawal cycle. The key thing to look forward to this week will be whether the two forthcoming compromises converge around targeted industrial flexibility or expose deeper divisions over the ETS's long term trajectory and market stability mechanisms. Both institutions are working towards positions that could enable trilogue negotiations in early 2027, with an agreement targeted for the first half of the year.

Wednesday, 28 October – UK Chancellor to present Autumn budget, the first under Burnham government

On Wednesday, the UK Chancellor John Healey will deliver the government's Autumn Budget, marking the first major fiscal statement since Prime Minister Andy Burnham's Labour administration took office in July. The announcement will provide an early indication of the new leadership's economic priorities, particularly its commitment to regional growth and devolution, while testing its ability to reconcile additional spending pressures with fiscal discipline and increasingly constrained public finances.

Overall, the Chancellor faces a difficult balancing act. Fiscal headroom inherited from his predecessor, Rachel Reeves, stood at approximately £24 billion in March but is now estimated to have fallen to around £12 billion, reflecting higher debt servicing costs, inflationary pressures and increased defence commitments. Healey must also accommodate demands for cost-of-living support and Burnham's ambition to distribute economic growth more evenly across the country, while maintaining market confidence in the government's fiscal framework. Importantly, the administration has pledged not to increase the headline rates of income tax, employee National Insurance or VAT, substantially narrowing its revenue raising options.

Against this backdrop, attention will focus on potential targeted tax measures, including changes to capital gains taxation, property-related levies and possible sector-specific taxes, particularly affecting banks. Business rates reform, measures to strengthen tax compliance and further support for investment are also expected to feature. The government has already announced a package of regulatory simplifications and extended tariff suspensions, which it estimates could save businesses almost £800 million annually, signalling an effort to offset fiscal constraints through measures aimed at reducing administrative costs.

Beyond individual tax announcements, the central question will be whether Healey can establish a credible fiscal strategy that accommodates the government's spending ambitions without unsettling gilt markets. The Office for Budget Responsibility's updated forecasts, the remaining fiscal headroom and the balance between tax increases, spending restraint and growth measures will therefore be particularly important for investors assessing the direction of the UK's ambitious economic policy under the new Labour leadership.

Thursday, 29 October – Friday, 30 October – EU-Canada Summit in Montreal to test prospects for deeper strategic partnership amid member state divisions over associate membership

European Commission President Ursula von der Leyen and Canadian Prime Minister Mark Carney will meet in Montreal on 29–30 October for an EU–Canada summit aimed at deepening bilateral cooperation across trade, defence, energy and critical raw materials. The meeting follows von der Leyen's unexpected proposal during her September State of the Union address to establish a form of EU associate membership for Canada, an unprecedented arrangement whose legal and institutional foundations remain undefined. While Article 217 TFEU provides a possible basis for an association agreement with a third country, the EU Treaties do not recognise associate membership as a distinct legal status. Moreover, Article 49 TEU reserves formal EU membership for European states, meaning that any arrangement with Canada would necessarily fall outside the conventional enlargement framework. A formal association agreement under Article 217 would require unanimous Council approval and the European Parliament's consent, while the precise institutional arrangements and potential need for a bespoke framework remain unresolved.

Ahead of the summit, significant disagreements have emerged over the proposed designation. Germany, France and at least six other member states appear opposed to using the term associate membership before its practical meaning has been established, although they broadly support strengthening relations with Canada. Negotiations over the summit's joint declaration are therefore focusing on identifying concrete areas of cooperation rather than immediately establishing a new institutional status. Six priority workstreams are expected to be launched, potentially covering participation in EU programmes such as Horizon Europe and Erasmus, critical minerals, undersea infrastructure and investment cooperation. Progress could be assessed after six months, with a broader review at the following EU–Canada summit. Energy cooperation also remains contentious, notably over references to nuclear energy.

The summit follows discussions with Canadian International Trade Minister Maninder Sidhu at the informal meeting of EU trade ministers in Dublin last Thursday, where cooperation on critical minerals, LNG and defence featured prominently. The unusually extensive EU delegation travelling to Montreal will include von der Leyen, High Representative Kaja Kallas, Executive Vice-Presidents Teresa Ribera, Henna Virkkunen and Stephane Sejourne, alongside Commissioners Maros Sefcovic, Andrius Kubilius, Maria Luís Albuquerque, Jessika Roswall and Glenn Micallef.

Beyond the institutional debate, the summit carries broader geopolitical significance as Brussels and Ottawa seek to diversify strategic partnerships amid deteriorating relations with Washington. President Donald Trump has already criticised the associate membership proposal and threatened retaliation, creating additional sensitivities ahead of the 3 November US midterm elections. The key question is whether the summit can translate political momentum into a credible framework for deeper integration without prematurely committing member states to an undefined membership model. The final declaration, particularly its terminology and proposed implementation timetable, will provide the clearest indication of how far the EU is prepared to go.

Thursday, 29 October – ECB expected to hold rates amid dual pressure from accelerating inflation and bond market volatility

The European Central Bank (ECB) will announce its latest monetary policy decision on Thursday, 29 October, with policymakers widely expected to leave interest rates unchanged despite a further acceleration in euro area inflation. The meeting follows the ECB's 25-basis-point increase in September, which brought the deposit facility rate to 2.50%, and comes amid growing concerns over the persistence of the Middle East energy shock and tightening financial conditions across European sovereign bond markets.

Euro area inflation accelerated to 3.8% in September, from 3.2% in August, with energy inflation reaching 18.8%. While higher energy costs remain the principal driver, the ECB is increasingly focused on whether these pressures could spread into underlying prices, wages and inflation expectations. So far, evidence of significant second round effects remains limited, supporting President Christine Lagarde's preference for a measured monetary policy response rather than an accelerated tightening cycle. Nevertheless, inflation is now running well above the ECB's 2% target, while oil prices exceeding $110 per barrel have raised questions about the durability of the central bank's September projections, which envisaged inflation averaging 3.0% in 2026 and 2.5% in 2027. 

A Reuters survey conducted earlier in October found that 70 of 73 economists expected the ECB to maintain its deposit rate at 2.50% this month, while 64 anticipated a further 25-basis-point increase in December. A majority expected rates to peak at 2.75%, although market pricing points towards a more extensive tightening cycle. The December meeting, accompanied by updated ECB economic projections, is therefore emerging as the more likely occasion for the next adjustment.

Beyond inflation, attention will also focus on the sharp rise in sovereign borrowing costs, particularly in France, where fiscal concerns have driven government bond yields higher and widened spreads against German Bunds. Although the ECB's Transmission Protection Instrument remains available to counter disorderly market dynamics that threaten monetary policy transmission, its activation threshold is considered high, particularly where market pressures reflect underlying fiscal vulnerabilities.

Given the wide expectations of a rate hike pause, the key watchpoint on Thursday will be the ECB's communication, in particular whether Lagarde reinforces expectations of a December increase, signals greater concern about second round inflation effects, or acknowledges that higher bond yields are already tightening financial conditions sufficiently to warrant a more cautious approach.