EUR/GBP slips as softer Eurozone inflation weighs on the Euro
- EUR/GBP slips as softer Eurozone inflation limits support for the Euro.
- Eurozone January inflation slows to a 16-month low, while German Q4 GDP meets expectations.
- BoE Governor Bailey says a March rate cut remains an “open question.”
The Euro (EUR) edges lower against the British Pound (GBP) on Wednesday as investors digest fresh Eurozone inflation figures and Germany’s fourth-quarter Gross Domestic Product (GDP) data. At the time of writing, EUR/GBP is trading around 0.8716, remaining on the back foot for a fourth consecutive day.
Data released by Eurostat showed that inflationary pressure eased at the start of the year. The Harmonized Index of Consumer Prices (HICP) rose 1.7% YoY in January, down from 2.0% in December, marking a 16-month low, according to final estimates. It also marked the first final reading below the European Central Bank’s (ECB) 2% target since May 2025.
On a monthly basis, the HICP was down 0.6 % in January.
The Core HICP fell 1.1% in January, reversing the 0.3% increase recorded in December. On a yearly basis, core inflation eased to 2.2% from 2.3%.
Despite the softer inflation figures, the data did little to materially shift expectations around the ECB’s monetary policy path, with markets broadly anticipating that rates will remain unchanged through 2026. ECB President Christine Lagarde reinforced that view on Monday, stating, “I very strongly believe that we are in that good place.”
Meanwhile, Germany’s fourth-quarter growth figures offered little surprise to markets. Europe’s largest economy expanded by 0.3% quarter-on-quarter in Q4, matching both expectations and the previous reading. On an annual basis, Gross Domestic Product (GDP) grew 0.4%, also in line with forecasts.
In the United Kingdom, expectations are gradually building that the Bank of England could lower interest rates in March. Speaking before Parliament’s Treasury Committee on Tuesday, BoE Governor Andrew Bailey said a rate cut remains a “genuinely open question,” adding that policymakers will continue to assess incoming data, particularly on inflation and wage growth.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.
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