EUR/GBP holds below 0.8600 ahead of Eurozone inflation data, BoE’s Bailey speech
- EUR/GBP softens to near 0.8575 in Tuesday’s early European session.
- Softer-than-expected German inflation data weighs on the Euro.
- The preliminary reading of Eurozone HICP inflation data and BoE’s Bailey speech will be closely watched later on Tuesday.
The EUR/GBP cross attracts some sellers to around 0.8575 during the early European session on Tuesday. The Euro (EUR) edges lower against the Pound Sterling (GBP) due to the softer-than-expected German inflation data. Traders will take more cues from the preliminary reading of Eurozone inflation data and the Bank of England (BoE) Governor Andrew Bailey speech later on Tuesday.
Preliminary data from the German statistics office on Monday revealed that German inflation, as measured by the Harmonized Index of Consumer Prices (HICP), eased to 2.0% YoY in June from 2.1% in the previous reading. This figure came in softer than the 2.2% expected.
On a monthly basis, the HICP rose by 0.1% in June, compared to 0.2% in May, below the market consensus of 0.3%. The softer-than-expected German inflation readings could weigh on the shared currency in the near term.
The BoE is expected to cut interest rates three times by the end of 2025, lowering them to 3.5% to combat sluggish economic growth and a weaker labor market. Rate reductions are anticipated in August, September, and November 2025, with probable quarterly reductions.
BoE Governor Andrew Bailey said last week that there were now signs that the UK labor market was softening, and he emphasized that interest rates are likely to continue falling. The dovish expectation from the UK central bank might help limit the downside for the cross.
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.