- EUR/GBP trades in negative territory for the fifth consecutive day around 0.8460 in Tuesday’s early European session.
- The German economy contracted 0.1% QoQ in Q2, compared to the previous reading of -0.1%, in line with estimation.
- BoE’s Bailey said he was “cautiously optimistic” about inflation, but it’s too early to declare victory on inflation.
The EUR/GBP cross extends its downside near 0.8460 during the early European trading hours on Tuesday. The Euro weakens as the sluggish growth outlook in the Eurozone has triggered bets on more rate cuts from the European Central Bank (ECB) in September. The attention will shift to the first reading of German and Eurozone inflation data for August, which are due later this week.
Data released by the Federal Statistics Office of Germany showed on Tuesday that the German Gross Domestic Product (GDP) for the second quarter (Q2) was in line with expectations. The economy contracted 0.1% QoQ in Q2, compared to the previous reading of -0.1%. On an annual basis, the GDP remained unchanged compared to the same quarter in 2023. The Euro remains under selling pressure in an immediate reaction to the German GDP report.
ECB Governing Council member Olli Rehn noted last week that the slowdown in inflation and weakness in the Eurozone economy supported the case for lowering borrowing costs next month. Traders expect the ECB to cut its benchmark interest rates by 25 basis points (bps) in the September meeting, which might continue to weigh on the shared currency in the near term.
The Bank of England (BoE) Governor Andrew Bailey said on Friday that he was “cautiously optimistic” about inflation, but it was premature to declare victory on inflation. The expectation that the UK central bank’s policy-easing cycle will be slower than that of other major central banks provides some support to the Pound Sterling (GBP) and acts as a headwind for EUR/GBP.
GDP FAQs
A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.
A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.
When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.
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