EUR/GBP strengthens to near 0.8700 ahead of Eurozone Retail Sales data
- EUR/GBP trades stronger near 0.8715 in Monday’s early European session.
- UK labor market risks grow, which would force the BoE to perform a delicate balancing act in the next meetings.
- The expectation that the ECB may have ended its current easing cycle could support the Euro.
The EUR/GBP cross loses ground to around 0.8715 during the early European session on Monday. The Pound Sterling (GBP) weakens against the Euro (EUR) amid growing United Kingdom (UK) labor market concerns. The Eurozone Retail Sales report for August will be released later on Monday.
The Bank of England (BoE) Deputy Governor Sarah Breeden last week argued in favour of reducing interest rates, citing economic risks that could bring inflation lower. Meanwhile, BoE Deputy Governor Clare Lombardelli and Monetary Policy Committee (MPC) member Catherine Mann warned that recent inflation shocks should not be considered as temporary. Worries over UK labor market risks could weigh on the GBP against the EUR in the near term.
On the Euro front, the cautious tone from the European Central Bank (ECB) might provide some support to the shared currency.ECB policymaker Martins Kazaks said on Thursday that the current level of interest rates is “very appropriate” and can be maintained. ECB President Christine Lagarde noted that she’s comfortable with the current policy settings as inflation in the euro area remains broadly stable.
Some analysts expect that the ECB may have ended its current easing cycle. Forward contracts on the ESTR (euro short-term rate) imply around a 60% possibility of a 25 basis points (bps) reduction by the first quarter next year.
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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