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EUR/GBP steadies above 0.8650, traders await BoE and ECB rate decisions amid Middle East uncertainty

  • EUR/GBP trades flat near 0.8660 in Monday’s early European session. 
  • The UK central bank is likely to keep rates on hold at the April policy meeting. 
  • The ECB will hold its deposit rate on Thursday. 

The EUR/GBP cross holds steady around 0.8660 during the early European trading hours on Monday. Markets turn cautious ahead of the European Central Bank (ECB) and the Bank of England (BoE) interest rate decisions on Thursday. 

The BoE is expected to keep interest rates on hold on Thursday and try to look ahead to the damage building up for the UK economy from the Iran war, while traders will be watching for any signs ‌it is moving towards raising rates. Analysts see the UK economy as particularly vulnerable to the rise in energy prices caused by the war due to the country's heavy use of natural gas.

"Our baseline forecast assumes Bank Rate will remain on hold for the rest of the year," said Edward Allenby, senior UK economist at Oxford Economics. "The committee will have more information about how the energy shock is feeding through to the economy by the end-July meeting,” Allenby added.  

On the Euro front, economists anticipate the ECB not making any moves at its meeting on Thursday and keeping its benchmark deposit rate at 2.0%, where it has been since June last year, as it waits to see how the war plays out. Policymakers adopt a wait-and-see approach amid high economic uncertainty caused by conflict in the Middle East. ECB official Martins Kazaks said last week that "we still have the large luxury of collecting data and forming our view.”

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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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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