Euro hits fresh 16-month lows against a firmer British Pound
- EUR/GBP dips to fresh lows at 0.8442 and posts a 1.9% decline in less than three weeks.
- UK Government's pledge for fiscal discipline has provided a fresh boost to the pound.
- Societe Generale's experts see chances of a further decline below 0.8400.
The Euro (EUR) resumes its downtrend against the British Pound (GBP) as France’s public debt keeps investors on their toes while the UK Government pledges fiscal discipline. The EUR/GBP pair has reached a fresh 16-month low at 0.8442 and shows a 1.92% decline in less than three weeks.
The Financial Times reported on Wednesday that UK Finance Minister John Healey is planning to finance its new initiatives with higher taxes or spending cuts, rather than with public debt, which has provided a fresh impulse to the Pound.
This makes a stark contrast with the Eurozone, which has all eyes on France, whose debt burden has spiralled to post-war levels, boosting concerns about a credit crisis. On Tuesday, the European Central Bank (ECB) President Christine Lagarde urged the French government to consolidate its fiscal policy and discarded the possibility of purchasing French bonds to ease borrowing costs.
High Oil prices increase the risk for Eurozone economies
Oil prices, however, remain steady at high levels amid reports of fresh attacks on Saudi Arabia by the Iran-backed Houthi militias and the new Iranian tactics to target vessels attempting to cross the Strait of Hormuz. Brent Oil prices remain above $104, boosting the risk of pushing Eurozone economies into a stagflation period of low growth and high consumer prices.
The Pound, meanwhile, has remained resilient to the energy shock so far. Strong UK data and hawkish comments by Bank of England (BoE) policymakers have boosted expectations that the bank might hike rates at November's meeting. Against this background, UK monthly GDP figures and Industrial production data, due on Thursday, will be carefully analysed to confirm those views.
Analysts at Societe Generale note that EUR/GBP has dipped below the July lows, a move that underscores the “prevalence of downward momentum.” Looking ahead, Societe Generale warns that “failure to reclaim last week's high at 0.8500 could result in a continuation of the decline,” with “the next projections…located at 0.8405 and 0.8370/0.8355.”
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.
Author
Guillermo Alcala
FXStreet
Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.
