EUR/GBP inches lower after two days of gains, trading around 0.8630 during the Asian hours on Friday. The currency cross remains subdued following the release of economic data from the United Kingdom (UK) and Germany.
The UK Gross Domestic Product (GDP) contracted by 0.1% MoM in April, following a 0.3% rise reported in March. The market forecast was for a 0.1% decline in the same period. Meanwhile, the Index of Services (April) rose 0.8% 3M/3M versus March’s 0.8%. Meanwhile, monthly Industrial Production came in at 0% MoM in April, while Manufacturing Production increased by 0.4% during the same period.
Money markets are currently pricing in at least a 25-basis-point interest rate hike by the Bank of England (BoE) this coming September, with a strong probability of a second increase before the end of the year. This potential tightening comes amid broader economic challenges, as political uncertainty surrounding the leadership of the Labour Party continues to weigh on investor sentiment and compound the current downturn.
Over in the Eurozone, inflation data met forecasts as Germany’s revised Harmonized Index of Consumer Prices (HICP) for May landed at 2.7% year-on-year. On a monthly basis, HICP growth experienced a slight contraction of 0.1%.
The European Central Bank (ECB) took aggressive action on Thursday by raising interest rates for the first time in nearly three years. The central bank also signaled a prolonged hawkish stance, indicating that restrictive monetary policy will likely remain firmly in place through 2027.
Euro FAQs
The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day.
EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy.
The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa.
The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control.
Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency.
A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall.
Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.
Another significant data release for the Euro is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought after exports then its currency will gain in value purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
