EUR/GBP softens to near 0.8650 after German Retail Sales data
- EUR/GBP loses traction to around 0.8650 in Wednesday’s early European session.
- German Retail Sales rose 4.9% YoY in June vs. 1.6% prior.
- The UK central bank is poised to slow quantitative tightening after a rise in yields.
The EUR/GBP cross trades on a negative note near 0.8650 during the early European session on Wednesday. The Euro (EUR) weakens against the Pound Sterling (GBP) despite the upbeat German economic data. Later on Wednesday, the preliminary reading of Gross Domestic Product (GDP) for the second quarter (Q2) from Germany and the Eurozone will be in the spotlight.
Data released by Destatis on Wednesday showed that German Retail Sales rose 1.0% month-over-month in June, compared to a 0.6% decline in May (revised from -1.6%). This figure came in above the market consensus of 0.5%. On an annual basis, Retail Sales climbed 4.9% in June versus 2.6% prior (revised from 1.6%). The EUR remains weak in an immediate reaction to the stronger-than-expected German Retail Sales data.
The United States (US) and the European Union (EU) are rushing to finalize the final details of a new trade agreement before US President Donald Trump's Friday deadline for reaching deals with countries other than China. Tariff uncertainty is likely to weigh on the shared currency in the near term.
On the other hand, cooling labor market conditions and elevated inflationary pressures in the United Kingdom (UK) might convince the Bank of England (BoE) to cut the interest rate in its August meeting. This, in turn, might drag the GBP lower and act as a tailwind for the cross.
Additionally, the BoE is expected to slow quantitative tightening, at which it shrinks its 558 billion-pound ($754 billion) holdings of government bonds, and economists hope next week will shed some light on its longer-term goals for the stockpile, 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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