EUR/GBP weakens below 0.8400 amid prospect of ECB rate cuts
- EUR/GBP softens near 0.8375 in Thursday’s early European session.
- Weak German employment data increased hopes of an ECB June cut, weighing on the Euro.
- BoE guided a gradual and cautious interest rate cut approach.
The EUR/GBP cross remains under selling pressure around 0.8375 during the early European session on Thursday. The Euro (EUR) weakens against the Pound Sterling (GBP) due to weak Eurozone data. Later on Thursday, Bank of England (BoE) Deputy Governor Sarah Breeden is set to speak.
Data released by the German Statistics Office on Wednesday showed that the Unemployment Rate in Germany remained steady at 6.3% in April. Meanwhile, Unemployment Change rose by 34K in April versus 4K prior. This figure came in above the market consensus of 11K. The downbeat data strengthens the case for further European Central Bank (ECB) easing in June, which drags the shared currency lower.
ECB Governing Council member Francois Villeroy de Galhau said more rate cuts could be on the way, with little sign at present of upward pressure on consumer prices. Rothschild Wealth Management analyst Bastian Freitag expected that the ECB will reduce interest rates by 25 basis points (bps) next week, bringing the deposit rate down to 2.00%.
On the other hand, the unexpectedly strong UK Consumer Price Index (CPI) inflation and Retail Sales have prompted investors to dial back hopes for a BoE rate cut in August. This, in turn, could provide some support to the GBP and act as a headwind for the cross.
The chance of a BoE rate cut in August was reduced to 40% by investors, down from 60% before the inflation data, according to Reuters. However, interest rate futures pricing suggested investors saw about 37 basis points (bps) of BoE rate reductions by the end of 2025.
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.
