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EUR/GBP posts modest gains above 0.8700 despite weak German Industrial Production data

  • EUR/GBP trades with mild gains around 0.8710 in Thursday’s early European session. 
  • German Industrial Production fell unexpectedly in February. 
  • BoE rate hike bets cool as trader sentiment resets. 

The EUR/GBP cross posts modest gains near 0.8710 during the early European trading hours on Thursday. The Euro (EUR) remains firm despite the downbeat German Industrial Production report. The attention will shift to the German Harmonized Index of Consumer Prices (HICP) inflation data, which will be published on Friday.

German industrial output falls unexpectedly in February, declining 0.3% MoM over the month, Destatis reported on Thursday. This figure followed 0% recorded in January (revised from -0.5%) and came in weaker than the expectation of a 0.9% rise. Annually, German Industrial Production arrived at 0% in the same period, following January’s revised 0.9% decrease. 

The European Central Bank (ECB) has adopted a hawkish tone, with policymakers signaling a shift toward potential further tightening if price pressures persist. This, in turn, could provide some support to the EUR against the GBP. Traders have ramped up bets, with markets now fully priced in two rate hikes and more than a 50% chance of a third move by December, according to Reuters.  

On the UK’s front, traders have cooled expectations for aggressive rate hikes from the Bank of England (BoE) following news of a tentative ceasefire. BoE Governor Andrew Bailey cautioned traders that markets may be "ahead of themselves" in pricing in multiple rate hikes, emphasizing that the current "right place to be is on hold."

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

Lallalit Srijandorn

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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