EUR/GBP holds steady as Eurozone inflation slows, UK data awaited
- EUR/GBP starts the week without a clear direction as investors digest mixed macroeconomic signals from Europe and the UK.
- Confirmed disinflation in the Eurozone strengthens the case for a prolonged pause in European monetary policy.
- Markets remain focused on upcoming UK data that could influence the monetary policy outlook in the United Kingdom.
EUR/GBP trades around 0.8670 on Monday at the time of writing, virtually unchanged on the day, in a context of relative stability of the Euro (EUR) against the Pound Sterling (GBP).
On the Eurozone side, the latest inflation data confirm a gradual disinflation trend. The Harmonized Index of Consumer Prices (HICP) was revised down to 1.9% YoY in December from 2.0% in the initial estimate, easing from 2.1% in November and coming in below market expectations. Core HICP, excluding volatile components, was confirmed at 2.3% YoY, after 2.4% previously, signaling a continued slowdown in underlying price pressures.
This environment supports the cautious approach of the European Central Bank (ECB). The central bank continues to favor a data-dependent, meeting-by-meeting approach, without committing to a specific rate path, helping to stabilize the Euro.
On the geopolitical side, rising frictions between the European Union (EU) and the United States (US) are adding to market uncertainty. European officials have signaled their readiness to retaliate if the tariff measures announced by US President Donald Trump are implemented. At the same time, European Union ambassadors have agreed to intensify diplomatic efforts aimed at discouraging Washington, while quietly preparing potential countermeasures.
On the contrary, UK Prime Minister Keir Starmer said that “tariffs are not the right way forward and should not be used against allies”, adding that the United Kingdom (UK) believes in partnership and will keep dialogue open. Despite these comments, Pound Sterling (GBP) is expected to remain volatile ahead of a data-heavy week in the UK.
Investors are now turning their attention to key UK releases, starting with labor market figures for the three months to November, due on Tuesday. The ILO Unemployment Rate is expected to edge down to 5% from 5.1%, while Average Earnings Including Bonuses are seen easing to 4.6% from 4.7%. The UK Consumer Price Index (CPI) and Retail Sales figures for December, along with the preliminary S&P Global Purchasing Managers’ Index (PMI) data for January, will also be closely watched for fresh clues on the monetary policy outlook of the Bank of England (BoE).
Against this backdrop, EUR/GBP price action is likely to remain driven by the balance between a Eurozone benefiting from well-anchored inflation and a United Kingdom facing persistent macroeconomic and monetary uncertainties.
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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