EUR/GBP holds positive ground above 0.8600 as traders await Eurozone HICP release
- EUR/GBP trades firmer to near 0.8620 in Thursday’s early European session.
- A slew of weaker UK data is likely to cement the case for the BoE to cut interest rates in August in a bid to boost the economy.
- The Eurozone GDP grew 0.1% QoQ in Q2, stronger than expected.
The EUR/GBP cross trades on a stronger note around 0.8620 during the early European session on Thursday. The Pound Sterling (GBP) edges lower against the Euro (EUR) as traders remain confident that the Bank of England (BoE) will cut interest rates next month after a slew of weaker UK economic data.
Last month, the BoE’s Monetary Policy Committee (MPC) voted six to three to keep rates unchanged at 4.25%, following a quarter-point reduction in May. Analysts expect the UK central bank to deliver a rate cut in its August meeting due to cooling labor market conditions and elevated inflationary pressures in the United Kingdom (UK). This, in turn, might continue to weigh on the GBP and act as a tailwind for the cross in the near term.
Additionally, the BoE is expected to slow quantitative tightening, at which it shrinks its 558 billion-pound ($754 billion) holdings of government bonds, and economists hope next week will shed some light on its longer-term goals for the stockpile, per Reuters.
The Eurozone Gross Domestic Product (GDP) came in stronger than expected in the second quarter (Q2), Eurostat reported on Wednesday. The Eurozone economy grew 0.1% QoQ in Q2 versus 0.6% prior, above the consensus of 0%. On an annual basis, the Eurozone GDP expanded 1.4% in Q2, compared to 1.5% in Q1, better than the forecasts of 1.2%.
The upbeat GDP data indicated that businesses are adapting to trade uncertainty, potentially reducing the need for more European Central Bank (ECB) interest rate cuts to stimulate the bloc, which provides some support to the shared currency.
Traders will take more cues from the preliminary reading of Harmonized Index of Consumer Prices (HICP) data for July, which are due later on Friday. HICP figures are expected to have grown moderately. However, any surprise downside of the reading could drag the Euro lower against the GBP.
Euro FAQs
The Euro is the currency for the 19 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.