EUR/GBP softens below 0.8650 on concerns over the French political crisis
- EUR/GBP weakens to around 0.8620 in Thursday’s early European session.
- Opposition parties said they will vote PM Bayrou out, raising fears of a French political crisis.
- BoE’s Mann said a more persistent hold on the bank rate is appropriate right now.
The EUR/GBP cross edges lower to near 0.8620 during the early European session. Fears of a French political crisis exert some selling pressure on the Euro (EUR) against the Pound Sterling (GBP). The release of Retail Sales and inflation reports from Germany will be closely watched later on Friday.
Business groups said on Wednesday that the French Prime Minister's plan to schedule a confidence vote next month poses significant risks to the economy, raising concerns about a potential recession. Reuters reported that opposition parties want to bring down the minority government in the September 8 vote, which was suddenly announced by Prime Minister Francois Bayrou on Monday, causing the eurozone's second-largest economy to face another crisis. Political uncertainty in France could undermine the shared currency in the near term.
Traders reduce odds of additional Bank of England (BoE) rate cuts amid persistent inflationary pressures, which might underpin the GBP and create a headwind for the cross. BoE Monetary Policy Committee (MPC) 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.
Traders will take more cues from the preliminary reading of the German Consumer Price Index (CPI) on Friday. The CPI is expected to show a rise of 2.1% YoY in August, while the Harmonized Index of Consumer Prices (HICP) is projected to show an increase of 2.0% YoY during the same report period. In case of a hotter-than-expected inflation outcome, this could boost the Euro 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.
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