EUR/GBP holds gains above 0.8600 on weak UK GDP data
- EUR/GBP edges higher to around 0.8630 in Friday’s early European session.
- The UK economy stagnated in January, weaker than expected.
- A hawkish tone from ECB policymakers underpins the Euro against the Pound Sterling.
The EUR/GBP cross holds positive ground near 0.8630 during the early European session on Friday. The Pound Sterling (GBP) weakens against the Euro (EUR) after the release of UK economic data. The Eurozone Industrial Production report for January will be published later on Friday.
Data released by the Office for National Statistics (ONS) on Friday showed that the UK economy flatlined in January, compared to a 0.1% increase in the previous month. This figure came in weaker than the estimation of a 0.2% rise in the reported period.
Meanwhile, the Index of services (January) increased by 0.2% 3M/3M versus December’s 0%. The UK monthly Industrial Production fell by 0.2% MoM in January, while Manufacturing Production climbed by 0.1% during the same period. Both figures came in below the market consensus. The GBP edges slightly lower in an immediate reaction to the downbeat UK economic data.
Traders have increased pricing for the European Central Bank (ECB) rate hikes after hawkish comments from central bank members. Policymaker Isabel Schnabel said on Wednesday that new quarterly forecasts will partly incorporate the economic impact of the war in Iran. ECB Governing Council member Peter Kazimir stated that a rate hike may be closer than thought, and the central bank could act if the war raises inflation expectations
Swaps pricing indicates markets expect the ECB to tighten monetary policy faster than previously thought. The ECB is now seen hiking as soon as June, according to LSEG data.
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.
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