Euro, Pound May Fall as Yen Gains on Post-Brexit PMI Data

Talking Points:

• UK and Eurozone PMI surveys to offer glimpse of post-Brexit slump
• Euro, Pound to fall if data boosts ECB, BOE stimulus expansion bets
• Japanese Yen likely to rise if PMIs trigger market-wide risk aversion

The Brexit referendum has come and gone without validating fears that a vote to leave the EU will trigger an instant market-wide crisis. A measure of overall UK financial conditions from Bloomberg that plunged to a four-month low in the immediate aftermath of the vote – stoking credit crisis fears – has since rebounded to the highest level since December 2015.

The spotlight now turns to evaluating the longer-term growth implications of uncertainty about what the EU/UK divorce entails. Firms and individuals are likely to delay spending and investment plans to wait for a clearer picture to emerge. This seems all but certain to trigger a significant slowdown on both sides of the English Channel.

Traders will get an initial glimpse of what this may look like as July’s flash PMI surveys cross the wires. UK manufacturing- and service-sector activity is expected to contract for the first time in at least three years. Meanwhile, analogous figures for the Eurozone are projected to show the most sluggish expansion since December 2014.

The markets are surely primed for a downturn already so it is the degree of weakness that will matter. Data pointing to a steeper slump than expected is likely to weigh on the Euro and the British Pound amid growing ECB and BOE stimulus expansion bets. It may also undermine broader market sentiment, boosting the anti-risk Japanese Yen. Needless to say, the opposite dynamic will probably follow upbeat results.

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--- Written by Ilya Spivak, Currency Strategist for DailyFX.com

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