EUR/USD weakens below 1.1800 ahead of German IFO survey release

EUR/USD softens to near 1.1800 in Wednesday’s Asian session.
Fed’s Powell renewed caution on inflation risk.
France’s S&P Global PMI is experiencing its most severe contraction in five months.

Lallalit Srijandorn FXStreet

The EUR/USD pair edges lower to around 1.1800, snapping the two-day winning streak during the Asian trading hours on Wednesday. The downtick of the major pair is pressured by a rebound in the US Dollar (USD) after the Federal Reserve (Fed) Chair Jerome Powell’s speech. The German IFO survey will be the highlight later on Wednesday.

Fed Chair Jerome Powell struck a cautious tone on further easing on Tuesday, which provide some support to the Greenback. Powell said the US central bank needs to continue balancing the competing risks of high inflation and a weak job market in its coming policy decisions. He further stated that policymakers likely have a difficult road ahead as they weigh further interest-rate cuts.

"Powell’s overnight remarks underscored the central bank’s cautious approach," said James Kniveton, senior corporate forex dealer at Convera. Traders slightly pared back bets for a Fed rate cut by year-end to about 33%, according to LSEG data. Markets continue to expect no change to policy in the October meeting.

Across the pond, political uncertainty and concerns over the economic downturn in France, the second-largest economy within the Eurozone, could weigh on the shared currency. The HCOB Flash France Composite Purchasing Managers' Index (PMI), compiled by S&P Global, fell to 48.4 in September from 49.8 in August. This figure registered its most severe contraction in five months. Meanwhile, both the manufacturing and services sectors declined sharply in September.

"That stands in contrast to Germany, where service activity picked up according to the PMI. With heightened political uncertainty, the French economy appears to be mirroring this sense of instability,” said Bert Colijn at ING.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling 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, its currency will benefit 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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