- EUR/GBP drifts higher to around 0.8380 in Monday’s early European session.
- Germany’s upper house approved the measures to unlock hundreds of billions of Euros in debt-financed defense and infrastructure spending.
- The Pound Sterling softens despite slightly hawkish remarks from the BoE.
The EUR/GBP cross gains traction to near 0.8380 during the early European session on Monday. The Euro (EUR) strengthens against the Pound Sterling (GBP) as Germany’s upper house of parliament signed off on a landmark debt reform plan. Later on Monday, the preliminary reading of the Purchasing Managers Index (PMI) reports from Germany and the Eurozone will be in the spotlight.
The Bundesrat, Germany's second chamber of parliament, on Friday, voted in favor of a massive spending package that is set to pour billions of euros into defense, infrastructure and climate protection. This, in turn, continues to underpin the shared currency in the near term.
The Pound Sterling has declined after the Bank of England (BoE) left interest rates unchanged on Thursday, keeping the central bank’s benchmark rate at 4.5%. The decision had been widely anticipated by markets. The GBP weakens even though the steady interest rate decision seemed slightly hawkish. BoE Governor Andrew Bailey said there is a lot of uncertainty at the moment, but he still thinks the monetary policy is on a “gradually declining path.”
The murky UK economic outlook, along with the elevated global policy uncertainty and weak confidence, could drag the GBP lower. However, investors will take more cues from the UK Consumer Price Index (CPI) inflation data for February, which will be published later on Wednesday.
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.
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