Euro holds steady against British Pound as traders await Eurozone HICP data
- EUR/GBP flatlines near 0.8645 in Tuesday’s early European session.
- The Eurozone HICP inflation report will be closely watched on Tuesday.
- Traders have dialed back aggressive BoE tightening bets.
The EUR/GBP cross trades on a flat note around 0.8645 during the early European trading hours on Tuesday. Traders prefer to wait on the sidelines ahead of the preliminary reading of the Harmonized Index of Consumer Prices (HICP) from the Eurozone, which will be published later on Tuesday.
The Eurozone HICP inflation report could offer some clues about the European Central Bank’s (ECB) interest rate outlook. Headline inflation is projected to rise to 3.2% YoY in May from 3.0% in April. If the report shows hotter-than-expected outcomes, this could boost the Euro (EUR) against the British Pound (GBP) in the near term.
Markets are now pricing in a high probability, nearly 92%, of a 25 basis point (bps) interest rate hike at the ECB’s next meeting on June 11, which would take the bank’s key deposit facility rate to 2.25%, and a 50% chance of another rate rise later this year in September, according to the ECB Watch Tool.
On the UK’s front, BoE governor Andrew Bailey said on Friday that the UK central bank is in no rush to raise interest rates while the outcome of the Iran war remains uncertain and the UK’s growth rate stays weak. Money market futures now imply 32 basis points (bps) of tightening this year, one quarter-point hike, and roughly a 30% chance of a second, according to Reuters.
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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