EUR/GBP softens below 0.8650 amid fears of French political crisis
- EUR/GBP weakens to around 0.8630 in Wednesday’s early European session.
- French PM is expected to lose a confidence vote in September, weighing on the Euro.
- BoE’s Mann said a “more persistent hold on Bank Rate is appropriate right now.”
The EUR/GBP cross trades in negative territory near 0.8630 during the early European session on Wednesday. The Euro (EUR) weakens against the Pound Sterling (GBP) amid French political uncertainty as French Prime Minister (PM) François Bayrou might lose a confidence vote on September 9.
France is braced for a new political crisis as the minority government of François Bayrou appears almost certain to be toppled in a confidence vote next month, amid deep political divisions over an unpopular austerity budget and debt-reduction plan. This, in turn, could exert some selling pressure on the EUR.
Additionally, the worse-than-expected German GfK Consumer Confidence Survey contributed to the shared currency’s downside. German GfK Consumer Confidence came in at -23.6 in September versus -21.7 prior (revised from -21.5). This figure came in below the market consensus of -21.5.
Traders reduce odds of further Bank of England (BoE) rate cuts amid persistent inflationary pressures. BoE Monetary Policy Committee member Catherine Mann, the most hawkish voice, said on Tuesday that she saw a strong case to keep the interest rate on hold for a prolonged period, underscoring concerns at the UK central bank about persistent inflation.
Her remarks came after an unexpected decision to cut interest rates earlier this month and data last week showing UK inflation hitting an 18-month high of 3.8%. Her hawkish comments provide some support to the GBP and create a headwind for the cross.
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.
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