EUR/GBP strengthens above 0.8675, traders brace for ECB rate decision
- EUR/GBP trades on a positive note around 0.8675 in Tuesday’s early European session, up 0.14% on the day.
- The ECB is expected to hold rates at the July meeting on Thursday.
- UK rate cut bets grow amid a cooling labor market and UK fiscal risks.
The EUR/GBP cross edges higher to near 0.8675 during the early European session on Tuesday. The Euro (EUR) strengthens against the Pound Sterling (GBP) as the European Central Bank (ECB) is expected to hold the interest rate steady at its July meeting on Thursday.
After eight quarter-point cuts that brought the deposit rate to 2%, ECB President Christine Lagarde said last month that the easing cycle is coming to an end. ECB policymakers believe they are well-positioned to deal with what comes next. "The central bank will now want to have more clarity on the trade outlook before it considers adjusting its policy further," said analysts from Italian bank UniCredit.
Trade tensions between the US and EU escalated after the Wall Street Journal (WSJ) reported that US President Donald Trump has demanded a higher baseline tariff in a range between 15% and 20% against 10%, which was being negotiated earlier. Meanwhile, the bloc stated that it is preparing retaliatory measures against the US if punitive trade tariffs are imposed. Tariffs and geopolitical uncertainty might weigh on the shared currency in the near term.
Persistent UK political and fiscal risks, along with a cooling labor market, might drag the GBP lower and create a tailwind for the cross. Money markets have priced in nearly an 89% odds that the BoE will lower borrowing costs in August, up from an 87% possibility before last week’s weaker UK employment data. Analysts expected the UK central bank to deliver two interest rate reductions by the end of the year, which would take the bank rate down to 3.75%.
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.
