EUR/GBP posts modest losses near 0.8650 ahead of German GDP release

EUR/GBP weakens to around 0.8650 in Friday’s early European session.
Hotter-than-expected UK July inflation data and upbeat UK PMI diminish odds of BoE rate reductions this year.
Eurozone and German Composite PMI data came in stronger than expected in August.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trades with mild losses near 0.8650 during the early European session on Friday. The expectations that the Bank of England (BoE) might hesitate to cut interest rates in the remainder of the year support the Pound Sterling (GBP) against the Euro (EUR). The release of Germany’s Gross Domestic Product (GDP) for the second quarter (Q2) will be published later on Friday.

UK inflation rose again in July to a hotter-than-expected 3.8% amid higher food prices and travel costs, prompting the expectation that the Bank of England (BoE) will delay further interest rate cuts. Furthermore, the upbeat preliminary UK S&P Global Purchasing Managers’ Index (PMI) data for August contribute to the GBP’s upside. The report showed that the Composite PMI rose at a faster pace to 53.0 in August from the previous reading of 51.5, above the consensus of 51.6.

The BoE cut the interest rates from 4.25% to 4.0% earlier this month as the UK central bank resumed what it describes as a “gradual and careful” approach to monetary easing. A quarter-point cut is not fully priced in until March 2026.

On the Euro front, the HCOB PMI data from Germany and the Eurozone showed economic resilience in August, complicating the European Central Bank’s (ECB) plans for further rate cuts this year. Germany's Composite PMI rose to 50.9 in August, driven by improvements in manufacturing output and new orders. This figure registered the highest level since March.

The Eurozone Composite PMI improved to 51.1 in August versus 50.9 prior. These reports may prompt the ECB to adopt a more cautious stance on further rate cuts. However, analysts believe that the significant impact of trade tensions earlier this year could add another layer of complexity to the ECB's decision-making process and cap the upside for the shared currency.

Traders will take more cues from the Germany’s GDP report later on Friday, which is estimated to grow 0.4% YoY in Q2. If the report shows stronger-than-expected outcome, this could help limit the EUR’s losses in the near term.

Euro FAQs

What is the Euro?

The Euro is the currency for the 19 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%).

What is the ECB and how does it impact the Euro?

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.

How does inflation data impact the value of the Euro?

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.

How does economic data influence the value of the Euro?

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.

How does the Trade Balance impact the Euro?

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

FXStreet

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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