Euro strengthens against British Pound as ECB signals June hike
- EUR/GBP gains ground to around 0.8630 in Tuesday’s early European session.
- ECB’s Schnabel said the central bank should raise rates in June, even if an Iran peace deal is struck.
- Analysts projected the BoE will hold the benchmark rate steady at 3.75% through the end of 2026.
The EUR/GBP cross gathers strength to near 0.8630 during the early European session on Tuesday. Hawkish remarks from the European Central Bank (ECB) provide some support to the Euro (EUR) against the British Pound (GBP). Traders will take more cues from the preliminary reading of Germany’s inflation data, which are due later on Friday.
ECB board member Isabel Schnabel said on Tuesday that the central bank should raise interest rates in June, even if ongoing peace talks with Iran yield a deal, as the conflict has been far longer than projected and high energy prices are spilling into the broader economy.
Additionally, ECB policymaker Martin Kocher said over the weekend that the central bank is increasingly leaning toward an interest rate hike next month as the Iran conflict adds to inflation pressures. According to the ECB Watch Tool, financial markets are now pricing in nearly an 85% probability of a 25-basis-point hike from the ECB for the June meeting.
Markets have scaled back imminent expectations for a rate hike following softer inflation data and an unexpected rise in the Unemployment Rate to 5.0% for April. Analysts from Oxford Economics and Goldman Sachs see the benchmark rate to stay unchanged at 3.75% through the end of 2026. Goldman Sachs further stated that the bar remains low for a few summer rate rises if energy costs surge again.
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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