The EUR/GBP rate fell after two days of gains, reaching around 0.8630 during Asian hours on Friday. The exchange rate remains feeble following the release of economic data from the United Kingdom (UK) and Germany.
Great Britain’s gross domestic product (GDP) contracted by 0.1% m/m in April, after growing by 0.3% in March. Market forecasts predicted a decline of 0.1% over the same period. Meanwhile, the Services Index (April) increased by 0.8% 3M/3M compared to 0.8% in March. Meanwhile, monthly industrial production was 0% m/m in April, while industrial production increased by 0.4% in the same period.
Money markets are currently pricing in a Bank of England (BoE) interest rate augment of at least 25 basis points next September, with a high likelihood of a second augment before the end of the year. This potential tightening comes against the backdrop of broader economic challenges, as political uncertainty around Labor’s leadership continues to weigh on investor sentiment and deepen the current economic downturn.
In the euro area, inflation data were in line with forecasts as Germany’s revised Harmonized Index of Consumer Prices (HICP) for May was 2.7% year-on-year. On a monthly basis, the HICP dynamics decreased slightly by 0.1%.
The European Central Bank (ECB) took aggressive action on Thursday, raising interest rates for the first time in almost three years. The central bank also signaled a prolonged hawkish stance, indicating that restrictive monetary policy is likely to continue until 2027.
Frequently asked questions about the euro
The euro is the currency of the 20 European Union countries belonging to the euro zone. It is the second most widely traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with average daily turnover exceeding $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% discount on all trades, 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 euro area. The ECB sets interest rates and manages monetary policy. The ECB’s primary task is to maintain price stability, which means controlling inflation or stimulating economic growth. Its basic tool is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher interest rates – will usually benefit the euro and vice versa. The Governing Council of the ECB takes decisions on monetary policy at meetings held eight times a year. Decisions are made by the heads of the euro zone’s national banks and six eternal members, including ECB President Christine Lagarde.
Inflation data in the euro area, measured by the Harmonized Index of Consumer Prices (HICP), is an vital econometric indicator for the euro. If inflation rises more than expected, especially above the ECB’s target of 2%, this obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to interest rates will typically benefit the euro as they make the region more attractive as a place to park money for global investors.
The published data are used to assess the condition of the economy and may affect the euro. Indicators such as GDP, PMIs for industry and services, employment and consumer sentiment surveys may influence the direction of the single currency. A mighty economy is good for the euro. Not only will it attract more foreign investment, but it may prompt the ECB to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is feeble, the euro will likely fall. The economic data for the four largest eurozone economies (Germany, France, Italy and Spain) is particularly vital as they constitute 75% of the eurozone economy.
The next vital data release for the euro is the trade balance. This indicator measures the difference between what a country earns from exports and what the country spends on imports over a given period. If a country produces a highly sought after export, its currency will only appreciate in value due to the additional demand generated by foreign buyers wanting to buy those goods. Therefore, a positive net trade balance strengthens the currency and vice versa in the case of a negative balance.
