Euro softens against British Pound despite ECB hike prospects
- EUR/GBP declines to near 0.8635 in Monday’s early European session.
- ECB rate hike chance rises as Iran conflict fuels inflation.
- BoE's Taylor sees less risk of inflation persistence than in 2022.
The EUR/GBP cross trades in negative territory around 0.8635 during the early European trading hours on Monday. Traders await the speeches from the European Central Bank (ECB) policymakers later this week, including President Christine Lagarde, for fresh impetus.
The ECB hinted that rising energy prices might push this year's inflation forecasts upward, supporting the case for a potential interest rate hike this year. According to Reuters, the case for the ECB to raise the interest rates in June is nearly sealed, but the central bank is likely to be noncommittal about any further move, looking to temper bets for a quick follow-up step in July.
On the UK’s front, softer UK Retail Sales data and an unexpected rise in the Unemployment Rate to 5.0% have prompted traders to scale back expectations for future Bank of England (BoE) rate hikes by December. This, in turn, might weigh on the GBP and acts as a tailwind for the cross.
BoE Policymaker Alan Taylor said that an "extended hold" is likely sufficient, adding that second-round inflationary impacts are less severe than those seen during the 2022 Russia-Ukraine invasion due to a cooling domestic jobs market. Financial markets are pricing in two quarter-point increases in interest rates by the UK central bank by the end of the year.
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.
Recommended Articles
