EUR/GBP Monthly Fundamental Forecast – August 2016

The EUR/GBP moved into August on a high note at 0.8447 seeing a gain of 0.60% on a monthly basis while on a YTD the pair is up almost 15% as the pound was hurt by the Brexit decision. The Bank of England Governor has signaled that policy easing is likely during the summer. We expect 50 bps of rate cuts in July, with additional QE also possible in August.

More specifically, investment projects that were in the pipeline are likely to be put on hold for a prolonged period, or cancelled outright. The main reason to expect investment to shrink is uncertainty. Until it becomes clear what trading relationships the U.K. may ultimately have with the rest of the world, or whether the U.K. will actually end up leaving the EU, firms are likely to sit on their hands. In contrast to the collapse in investment during 2008-09.

The path for fiscal policy will depend on the stance of the next Chancellor. The current front-runner to be the next Prime Minister, Theresa May, has said that her Government will abandon plans to reach a budget surplus by the end of the parliament. In other words, the severity of the austerity program is likely to be substantially reduced. At present, the structural deficit is projected to narrow by around ¾% of GDP per year. We suspect that, at the very least, the Budget will turn neutral in the very near term amid near zero GDP growth.

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