Euro wavers within range against British Pound with markets calm and little data
- EUR/GBP edges up to 0.8560 from 0.8546 lows but remains wavering within the monthly range.
- The Euro drew some support from upbeat German GDP and business climate figures on Tuesday.
- ING Analysts see the pair appreciating towards 0.8700 in the coming months.
The Euro (EUR) edges up for the second consecutive day against the British Pound (GBP) on Wednesday, trading halfway within the monthly range. The EUR/USD pair extends its recovery to 0.8560 after bouncing from 0.8546 on Tuesday, as traders bide their time awaiting US PCE inflation figures, with the calendar in the Eurozone and the UK practically void,
The Euro drew some support from the upbeat German macroeconomic figures released on Tuesday. The second quarter’s German Gross Domestic Product was revised higher, while the IFO Business Climate Index for August rose to its highest reading in one year, with both the sentiment about the current business situation and the economic expectations improving beyond the market forecasts.
ING: Carry trade supports the Sterling
The UK calendar is practically void this week, but FX analysts at ING argue that, in the current “low volatility environment, sterling is probably still enjoying some carry demand given it is one of the highest, volatility-adjusted currencies in G10.” Against that backdrop, they expect “EUR/GBP can probably hang around these 0.8550 levels for the time being.”
ING adds that “our call is that the BoE does not need to hike again, but that the realisation of that may not weigh on sterling until later in the year,” suggesting any policy-driven drag on the Pound is likely to be delayed rather than immediate.
Looking ahead, ING experts forecast that, "if calm is indeed restored in the bond market, expect the pair to return to tracking short-term rate differentials closely." In that context, they reiterate a constructive view on EUR/GBP, stating that "we still expect no hikes and a move to 0.870 in the coming months on the back of dovish repricing in the GBP front end."
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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