EUR/GBP gains ground above 0.8650 ahead of Eurozone Retail Sales release
- EUR/GBP gathers strength to near 0.8680 in Thursday’s early European session.
- Economists anticipate the ECB will leave the deposit rate unchanged in the September meeting.
- UK Finance Minister denies UK economy is broken, pledges tight spending.
The EUR/GBP cross gains traction to around 0.8680 during the early European session on Thursday. The Euro (EUR) strengthens against the Pound Sterling (GBP) as market bets that interest rates will remain unchanged in the near term. The Eurozone Retail Sales will take center stage later on Thursday.
Eurozone inflation rose in August, staying close to the European Central Bank’s (ECB) 2% target and likely firming up market bets that interest rates will remain steady in the near term, even if the rate cut debate could still simmer. ECB board member Isabel Schnabel said earlier Tuesday that the interest rates are already mildly accommodative, adding that she does not see a reason for a further rate cut.
Traders will take more cues from the Eurozone Retail Sales, which is expected to show a rise of 2.4% year-over-year in July. The attention will shift to the Eurozone Gross Domestic Product (GDP) for the second quarter (Q2) later on Friday for fresh impetus.
The UK markets suffered a fresh sell-off on Tuesday, with the UK government's long-term borrowing costs reaching their highest level since 1998, which exerted some selling pressure on the GBP. Nonetheless, the Pound Sterling finds some relief after a pause in the rally in UK gilt yields and UK Finance Minister Rachel Reeves’s remarks.
Reeves said on Wednesday that she would deliver her annual budget on November 26, insisting the economy was not "broken" and that she would keep a grip on spending to help lower inflation and borrowing costs, per Reuters.
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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