EUR/GBP Monthly Fundamental Forecast January 2016

Outlook and Recommendation

The EUR/GBP closed the month at 0.7366 as both currencies weakened in December. The pair saw an annual decline of 6% but was up 3.76 on the month.  Analysts have revisited the UK growth path for the coming quarters, was the soft tone as regards future fiscal austerity in George Osborne’s Autumn Statement on public finances. As we raise our forecast slightly on news of continued underlying strength in the domestic economy and prospects of a less restrictive fiscal policy, the urgency for monetary policy normalization is more evident than ever. The Bank of England should follow the US central bank by tightening monetary policy in the first half of 2016.

In the Eurozone the latest advance estimate of consumer price inflation for the month of November was a disappointment. Core inflation which has shown resilience thus far, hardly displaying any pass-through effect from the strong decline of commodity prices, dropped back to a level of 0.9% where it stood in August and September of this year.

This preliminary print, however, did not trigger an overreaction of the ECB, which actually disappointed market expectations in terms of further easing measures. The disappointing CPI print was mainly the result of a weak print out of Italy, where the end of the Milan exposition created a temporary plunge of services prices. In the wake of its meeting, the ECB also revised down its own inflation outlook last updated in September of this year.

The pound is expected to gain in January while the euro is set to weaken leaving the pair lower.

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.

Major Economic Events Scheduled In January