EUR/GBP extends upside to near 0.8750 on EU-US trade deal
- EUR/GBP extends the rally to 0.8740 in Monday’s early European session.
- US and the EU agreed on a framework trade deal on Sunday, supporting the Euro.
- UK Retail Sales rebounded modestly in July, but were weaker than expected.
The EUR/GBP cross gathers strength to around 0.8740 during the early European trading hours on Monday. The Euro (EUR) strengthens against the Pound Sterling (GBP) as the European Union (EU) agrees to the United States (US) trade deal ahead of the deadline. The preliminary reading of Gross Domestic Product (GDP) for the second quarter (Q2) from Germany and the Eurozone will take center stage on Wednesday.
On Sunday, the US and EU agreed on a US tariff on all EU goods of 15%, ending a months-long standoff between two of the world's biggest economic partners. That is half the 30% import levies that US President Donald Trump had threatened to implement starting on Friday. Easing fears of US-EU trade tensions could provide some support to the shared currency in the near term.
"The trade agreement negotiated by the European Commission with the United States will bring temporary stability to economic actors threatened by the escalation of American tariffs, but it is unbalanced," said France's European Affairs Minister Benjamin Haddad on X.
On the GBP’s front, a slowdown in the UK private sector activity, a cooling labor market, and weaker UK Retail Sales data could undermine the Pound Sterling and act as a headwind for the cross. Data released by the Office for National Statistics (ONS) showed on Friday that the UK Retail Sales increased 0.9% MoM in June, versus a fall of 2.7% prior. This figure came in weaker than the market consensus of a rise of 1.2%.
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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