EUR/GBP strengthens above 0.8650, French political uncertainty might cap the EUR’s upside
- EUR/GBP gains ground near 0.8680 in Thursday’s early European session.
- France’s Macron will appoint a new Prime Minister within 48 hours.
- BoE's Pill said policymakers should adopt a 'conservative' approach to setting rates.
The EUR/GBP cross rebounds to around 0.8680 during the early European session on Thursday. The Euro (EUR) edges higher against the Pound Sterling (GBP) as French President Emmanuel Macron is set to appoint a new Prime Minister in the next 48 hours. The European Central Bank (ECB) Monetary Policy Meeting Accounts will be released later on Thursday. Also, ECB policymaker Philip Lane is scheduled to speak.
The political crisis in France after the shock resignation of France’s Prime Minister Sebastien Lecornu and his government dragged the EUR lower in the previous session. French President Emmanuel Macron said on Wednesday that he will name a new Prime Minister within the next 48 hours in the latest effort to end a period of political turmoil in the Eurozone's second-largest economy.
The announcement could offer some near-term support to the EUR. However, lingering political uncertainty in France might continue to limit the potential upside for the cross.
On the GBP’s front, Bank of England (BoE) Chief Economist Huw Pill said on Wednesday that central bankers should adopt a "conservative" approach to setting interest rates, including responding firmly if price growth gets out of hand. The upside for the major pair might be capped, as the uncertainty over the BoE’s monetary policy outlook has increased.
The latest BoE Financial Policy Committee (FPC) Record noted that UK households and businesses remain resilient despite the "higher cost of living and borrowing costs". The minutes further stated that the overall global risk outlook remains elevated, with potential spillovers to the UK financial system considered “material."
Euro FAQs
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%).
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
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.
