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According to the latest PMI surveys, the Euro zone's economic recovery gained pace in August despite the uncertainty created by the recent Brexit vote. In your point of view, is the Brexit shock over or not? Why?
It is important to differentiate here between the market related and the real economic impact of the Brexit vote. The market shock was indeed less severe than many investors had feared. This may be for two reasons: first, Britons have voted to leave the EU but the outcome will become effective only from 2019 or later. Markets seem to have put this medium term risk aside – at least for now. Second, central banks have (BoE) and still may extend quantitative measures (ECB), which obviously outweighed the negative Brexit effect.
Looking at the real economic effect of the Brexit vote, it is still much too early for a final assessment. We expect the Brexit vote to have a negative economic impact on the UK as well as some other EU countries. The closer the Brexit comes, the bigger the negative impact could be. Especially in case UK and EU would divorce without any new legal agreement, the negative consequences could be considerable.
The European Central Bank's policymakers widely agreed not to discuss any policy change at their July policy meeting despite the Brexit vote, minutes of the meeting revealed. In your opinion, should we expect the ECB to add more monetary stimulus at its meeting in September?
It is rather unlikely that the ECB will not announce any new measures in September. Given current conditions the market is running short of PSPP eligible bonds. As the ECB will continue with PSPP until March 2017 and probably even beyond, it will have to find a solution by doing some changes to its programme. The market is discussing another cut of the deposit rate as well as changes to the PSPP purchasing key. We think that changes to the issue limit of Non-CAC bonds may have the biggest impact and are therefore favourable. The European Central Bank would probably buy some time but in a couple of months from now even changes to the PSPP might not be sufficient in case inflation expectations still remain far below the close to 2% medium-term target. Hence, we do not expect the ECB to announce a general shift to less expansive stance any time soon.
What will be the major drivers for the Euro through the rest of the year? What are your forecasts for EUR/USD and EUR/JPY for the same period?
Our FX analysts expect the EUR/USD to remain at 1.12 on three, six and 12 month horizon. For the USD/JPY currency pair we forecast a rise to 102, 103 and 106 for the same periods.