EUR/GBP holds gains near 0.8700 as Germany's tax revenues increase
- EUR/GBP holds steady after Germany’s finance ministry reported a 2.6% YoY increase in federal and state tax revenues for September.
- Germany’s economy shrank for second straight year in 2024, with the government forecasting modest growth of just 0.2% in 2025.
- The Pound Sterling may gain ground due to cautious BoE policy outlook.
EUR/GBP gains ground after two days of losses, trading around 0.8690 during the Asian hours on Tuesday. The currency cross appreciates as the Euro (EUR) could receive support after Germany's finance ministry reported that federal and state government tax revenues were up 2.6% year-over-year in September. However, the German ministry also added on Tuesday that tax revenues will not get a boost from economic momentum in the short term.
The largest economy in Europe contracted for the second consecutive year in 2024, with the government projecting only 0.2% growth for 2025. The report noted that leading indicators show no signs of “a noticeable acceleration in economic momentum in the short term,” per Reuters.
However, the Euro struggled as traders weighed S&P Global Ratings’ downgrade of France against improving global risk sentiment. S&P lowered France’s credit rating to A+ from AA-, citing “elevated” budget uncertainty despite the government’s submission of its 2025 draft budget.
The EUR/GBP cross may again lose ground as the Pound Sterling (GBP) may draw support from cautious tone surrounding the Bank of England’s (BoE) policy outlook, driven by the persistent inflation in the United Kingdom (UK).
Traders will likely observe the UK Consumer Price Index (CPI) and Retail Sales data due on Wednesday to gain fresh impetus about whether the BoE will cut interest rates again in the remaining year. BoE Governor Andrew Bailey emphasized last month that the UK central bank was "not out of the woods yet" on inflation.
However, the UK labor market data for three months ending August showed a slowdown in wage growth and a further increase in the jobless rate. This has increased the likelihood that the BoE will cut borrowing rates again by year-end.
German economy FAQs
The German economy has a significant impact on the Euro due to its status as the largest economy within the Eurozone. Germany's economic performance, its GDP, employment, and inflation, can greatly influence the overall stability and confidence in the Euro. As Germany's economy strengthens, it can bolster the Euro's value, while the opposite is true if it weakens. Overall, the German economy plays a crucial role in shaping the Euro's strength and perception in global markets.
Germany is the largest economy in the Eurozone and therefore an influential actor in the region. During the Eurozone sovereign debt crisis in 2009-12, Germany was pivotal in setting up various stability funds to bail out debtor countries. It took a leadership role in the implementation of the 'Fiscal Compact' following the crisis – a set of more stringent rules to manage member states’ finances and punish ‘debt sinners’. Germany spearheaded a culture of ‘Financial Stability’ and the German economic model has been widely used as a blueprint for economic growth by fellow Eurozone members.
Bunds are bonds issued by the German government. Like all bonds they pay holders a regular interest payment, or coupon, followed by the full value of the loan, or principal, at maturity. Because Germany has the largest economy in the Eurozone, Bunds are used as a benchmark for other European government bonds. Long-term Bunds are viewed as a solid, risk-free investment as they are backed by the full faith and credit of the German nation. For this reason they are treated as a safe-haven by investors – gaining in value in times of crisis, whilst falling during periods of prosperity.
German Bund Yields measure the annual return an investor can expect from holding German government bonds, or Bunds. Like other bonds, Bunds pay holders interest at regular intervals, called the ‘coupon’, followed by the full value of the bond at maturity. Whilst the coupon is fixed, the Yield varies as it takes into account changes in the bond's price, and it is therefore considered a more accurate reflection of return. A decline in the bund's price raises the coupon as a percentage of the loan, resulting in a higher Yield and vice versa for a rise. This explains why Bund Yields move inversely to prices.
The Bundesbank is the central bank of Germany. It plays a key role in implementing monetary policy within Germany, and central banks in the region more broadly. Its goal is price stability, or keeping inflation low and predictable. It is responsible for ensuring the smooth operation of payment systems in Germany and participates in the oversight of financial institutions. The Bundesbank has a reputation for being conservative, prioritizing the fight against inflation over economic growth. It has been influential in the setup and policy of the European Central Bank (ECB).
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