Euro dips to session lows near 0.8580 following German Trade Balance data
- EUR/GBP extends losses to 0.8580 as Eurozone data fails to impress.
- German trade surplus widened in July although exports contracted against expectations.
- British Pound bulls remain subdued, as the market digests Chancellor Healey's first speech.
The Euro (EUR) extends losses for the third consecutive day against the British Pound (GBP) on Tuesday, as German Trade Balance data added to evidence of the frail recovery of the Euro Area's leading economy. This leaves the EUR/GBP on its back foot, trading at 0.8580 after rejection at the 0.8600 area last week
German Trade Balance data from July beat expectations earlier on Tuesday, as the surplus widened to EUR 21.3 billion, well above the EUR 16 billion expected and the EUR 15.4 billion seen in June. Looking at the details, however, data from the Federal Statistics Office of Germany revealed that the surplus was due to a 5.7% decline in imports, which offset a 0.8% decline in exports.
German data reflects frail economic growth
These figures add to evidence of a softening German economic growth, highlighted on Monday by the negative surprise in the German Industrial Production report. Factory output dropped 1.1% in July, against expectations of a 0.3% increase, weighed by a sharp decline in the country’s automotive sector.
German data offset optimism from positive Eurozone Gross Domestic Product (GDP) data, which was revised up to 0.6% growth in the second quarter, up from the previously estimated 0.4%.
The pound, meanwhile, remains subdued as markets digest John Healey's first speech as UK Chancellor. Strategists at Brown Brothers Harriman note that Healey has pledged to build a solid fiscal “buffer against uncertainty” in the October 28 Budget. They argue this commitment “points to a mix of tax rises and spending cuts” as higher borrowing costs are estimated to have halved the government’s fiscal headroom to around “£12bn,” underscoring the scope for a tighter fiscal stance ahead.
Against this background, BBH assesses that “the UK’s negative output gap, a policy rate above the mid-point of the BoE’s 2% to 4% neutral range estimate and the prospect of tighter fiscal policy” are factors that “argue for a less aggressive hiking cycle,” leaving the Pound vulnerable to a dovish repricing if incoming data fail to justify the degree of tightening currently implied by rates markets.
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.
