EUR/GBP depreciates to near 0.8400 due to stable political conditions in the UK
- EUR/GBP extends its losing streak as the Pound Sterling displays strength due to stable political conditions in the UK.
- This unexpected growth in the UK economy has diminished the likelihood of a BoE’s August rate cut.
- The Euro may gain ground on the back of reduced concerns about a French financial crisis.
EUR/GBP continues its losing streak for the third successive session, trading around 0.8410 during the European hours on Friday. The Pound Sterling (GBP) shows significant strength against its major peers following the outright victory of Keir Starmer’s Labour Party in the parliamentary elections, leading to the most stable political conditions in the United Kingdom (UK).
The outlook for the British Pound has improved, as a stable government results in predictable fiscal policies, attracting significant foreign inflows. Additionally, the UK's new Chancellor, Rachel Reeves, pledges to stimulate growth and investment with a major focus on the supply side due to the limited scope of government spending.
In May, the UK Gross Domestic Product (GDP) expanded by 0.4% month-over-month, surpassing market expectations of a 0.2% increase. This unexpected growth has diminished the likelihood of an August rate cut by the Bank of England (BoE). Additionally, the Bank of England Chief Economist Huw Pill emphasized that although a rate cut remains a possibility, concerns persist regarding high service prices and wage growth, according to Reuters.
In Europe, the Euro has found support amid easing concerns of a French financial crisis following Marine Le Pen's far-right National Rally's inability to maintain dominance over French President Emmanuel Macron's centrist alliance and the left-wing New Popular Front led by Jean-Luc Melenchon.
In addition to reduced fears of a French financial crisis, diminishing expectations of consecutive rate cuts by the European Central Bank (ECB) have stabilized the Euro's demand. Traders are scaling back bets on ECB back-to-back rate cuts as policymakers hesitate to commit to a specific path of rate reductions, concerned that an aggressive approach could reignite inflationary pressures.
UOB Group FX analysts Quek Ser Leang and Peter Chia suggest the EUR/USD pair is likely to trade within a range of 1.0845 to 1.0900. They anticipate continued upward movement in the Euro, though achieving 1.0915 may take some time.
Full article: EUR/USD may rise to 1.0915 in short term – UOB Group
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
