EUR/GBP Fundamental Forecast – September 2, 2016

The EUR/GBP fell 76 points as the pound rallied over 100 points against the US dollar today after better than expected manufacturing PMI data was released showing that the UK has been outperforming since the Brexit vote. The pair is trading at 0.8417.
Sixty days after the U.K.’s Brexit vote, the 19-nation economy is beginning to show signs of faltering, suggesting that more stimulus may be warranted. Business and consumer sentiment declined, and executives are warning that orders may suffer from political uncertainty. The International Monetary Fund has already cut its forecast for euro-area growth next year, and the European Central Bank will release new projections after its meeting next week.
Eurozone and German Manufacturing PMIs both showed expansion in the manufacturing sector, with readings of 51.7 and 53.6 points, respectively. Although the Eurozone release was just shy of the forecast of 51.8 points, it did mark a 3-month low, which could raise concerns. As well, French and Italian Manufacturing PMIs failed to crack the 50-point threshold, pointing to contraction. Inflation in the Eurozone remains weak, although this week’s releases were close to the estimates, so the euro showed little reaction. German Preliminary CPI dropped to a flat 0.0% in August, down from 0.3% a month earlier. This was close to the forecast of 0.1%. Eurozone CPI remained steady at 0.2%, shy of the estimate of 0.3%. These soft numbers will add pressure on the ECB to adopt further monetary easing at its policy meeting on September 7. Meanwhile, German consumer spending and jobless numbers impressed in July. Retail Sales sparkled, jumping 1.7%, its strongest reading in over a year. Employment Change was unchanged at -7 thousand, beating the forecast of -2 thousand.

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