Eurozone Post-Brexit Rebound Expected to Continue

European equity markets are expected to open a little higher on Tuesday following a mixed session in Asia overnight, as traders await data from the euro area this morning  while maintaining a little caution ahead of Janet Yellen’s Jackson Hole speech at the end of the week.

After a very slow start to the week on the data side, we’ve got PMI data from the eurozone, Germany and France throughout the morning followed by manufacturing and housing data from the US this afternoon. The eurozone figures will be of particular interest as we continue to seek evidence of the Brexit impact on the UK’s largest trading partner. While it’s too early to get this from the hard data, releases like the PMIs are a good source of early insight into how the region will respond.

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The initial response was quite worrying, with PMI readings taking a hit in the immediate aftermath, particularly in the services sector. Confidence quickly rebounded though in August and we’re expecting it to have built marginally on this again in the September flash reading. Some of the bright spots from the last report, such as the improving employment trend in the euro area could again be a positive point of today’s report but with Brexit risks remaining, we may not be able to get too carried away with the data as confidence could quickly turn sour again.

With all this in mind, we have to wonder whether the ECB is going to be in any rush to ease monetary policy further to cushion the blow of the Brexit vote. There’s no hard data to suggest the economy has suffered, the euro is trading around the same levels it was prior to the vote and even the survey’s don’t indicate an immediate threat lies ahead. Under the circumstances, it’s tough to see the ECB taking the leap at the next meeting having announced a large stimulus package only in March. Instead it’s more likely to continue to monitor the situation and warn it’s ready and willing to act if necessary.

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Yellen’s speech on Friday remains the headline event this week and I think we could continue to see an element of caution in the markets in the lead up to this. Investors are still not buying a 2016 rate hike, even following Stanley Fischer’s comments over the weekend regarding the economy – markets now marginally pricing in February – so the probability that Yellen says something that goes against what’s priced in seems quite high. The only question is whether she’ll strongly hint at a hike this year or indicate that holding off to early next year may be warranted, at which point markets would push the hike right back once again.

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Craig Erlam
Based in London, England, Craig Erlam joined OANDA in 2015 as a Market Analyst. With more than five years' experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while conducting macroeconomic commentary. He has been published by The Financial Times, Reuters, the BBC and The Telegraph, and he also appears regularly as a guest commentator on Bloomberg TV, CNBC, FOX Business and BNN. Craig holds a full membership to the Society of Technical Analysts and he is recognized as a Certified Financial Technician by the International Federation of Technical Analysts.