EUR/GBP Fundamental Forecast – June 2016

The EUR/GBP dipped 2.18% this month to close at 0.7677 as the pound rallied a bit and the euro remained weak. UK real GDP growth started the year off soft and is expected to weaken further in the months leading up to the June 23rd EU referendum. Nevertheless, we believe that it is premature to blame the deceleration in first quarter growth on pre Brexit vote jitters. Rather, the dip in services sector output suggests that the slowdown was a symptom of wider global growth concerns and financial market volatility in early 2016, which provoked a slump in equities and bond yields. However, analysts do expect pre-Brexit vote uncertainty to dampen second quarter growth, as firms will likely opt to postpone investment and hiring decisions, while consumers may be inclined to delay big-ticket purchases.

The European Central Bank (ECB) unveiled a fresh round of monetary stimulus in March — including cutting benchmark interest rates to new record lows and increasing its asset purchase program by €20bn per month to €80bn — in an attempt to lift inflation towards the ECB’s close to, but below, 2% target. The headline inflation print, however, has fallen back into negative territory in April at -0.2% y/y from 0% in March, dampened by the drag from lower energy prices, and is forecast to remain below the ECB’s target until at least 2018. Eurozone inflation is forecast to end the year at 1% y/y in 2016 and 1½% in 2017.

Traders will be on edge all month ahead of the Brexit vote while the ECB meeting this week could spark a bit of volatility as Mario Draghi will most likely address low inflation as well as the effects of a UK departure.

FxEmpire provides in-depth analysis for each currency and commodity we review. Fundamental analysis is provided in three components. We provide a detailed monthly analysis and forecast at the beginning of each month. Then we provide more recent analysis and information in our weekly reports and we provide daily updates and outlooks.

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