Euro softens against British Pound ahead of Eurozone GDP data
- EUR/GBP loses ground to around 0.8660 in Wednesday’s early European session.
- Traders will closely monitor the Trump-Xi summit in Beijing later this week.
- The intense political instability in the UK could undermine the British Pound.
The EUR/GBP cross loses momentum to near 0.8660 during the early European trading hours on Wednesday. The Euro (EUR) weakens against the British Pound (GBP) due to fears over the Eurozone's economic exposure to energy shocks from the Middle East and stalled US-Iran peace negotiations.
CNN reported on Tuesday that US President Donald Trump has grown increasingly frustrated with how the Iranians are handling talks to end the conflict, and some Trump aides say that he is now more seriously considering a resumption of major combat operations than he has in recent weeks.
Trump said late Tuesday that he would prioritize trade discussions during his summit with Chinese President Xi Jinping and downplayed the amount of attention they would devote to the Iran war. Signs of escalating tensions between the US and Iran could drag the EUR lower against the GBP as the Eurozone suffers from a higher net dependency on imported energy.
However, hawkish comments from the European Central Bank (ECB) officials might help limit the EUR’s losses. ECB policymaker Joachim Nagel said on Wednesday that the probability that the central bank will need to raise borrowing costs due to the Iran war is rising.
Furthermore, intense political instability in the United Kingdom (UK) could weigh on the British Pound and act as a tailwind for the cross. UK Prime Minister Keir Starmer is facing rising pressure to set a date for his departure after elections across much of the country resulted in massive losses for his ruling Labour Party. The Labour Party suffered a historic wipeout in the local elections, losing more than 1,100 council seats that it previously held.
The preliminary reading of the Eurozone Gross Domestic Product (GDP) for the first quarter (Q1) will be published later in the day. The Eurozone economy is projected to grow 0.8% YoY in Q1.
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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