Key Moments
- EUR/GBP trades near 0.8630, maintaining gains above the 0.8600 level in early European dealings.
- UK GDP was unchanged in January, missing expectations for 0.2% growth after a 0.1% rise in the prior month.
- Markets price in a faster pace of ECB tightening, with swaps indicating a potential rate hike as early as June.
EUR/GBP Supported by Weak UK Macro Data
The EUR/GBP cross is holding firm around 0.8630 in early European trade on Friday, with the Pound Sterling under pressure following the latest batch of UK economic releases. The Euro is finding support against the Pound as investors react to softer-than-expected data from the United Kingdom.
According to figures from the Office for National Statistics (ONS) published on Friday, UK gross domestic product was unchanged in January, following a 0.1% expansion in the previous month. Economists had anticipated a 0.2% increase, making the flat reading a downside surprise relative to expectations.
In the services sector, the Index of services for January rose by 0.2% on a 3M/3M basis, compared with 0% in December, signaling modest improvement. However, industrial activity painted a weaker picture: UK Industrial Production declined by 0.2% month-on-month in January, while Manufacturing Production edged up by 0.1% over the same period. Both of these production indicators came in below market forecasts.
The initial market reaction saw the Pound drift lower, as traders reassessed the growth outlook in light of the underwhelming data.
ECB Hawkish Tone Drives Policy Repricing
On the Euro side, sentiment has been buoyed by a shift in expectations around the European Central Bank’s policy path. Traders have increased bets on further rate hikes after recent hawkish rhetoric from ECB officials.
Policymaker Isabel Schnabel commented on Wednesday that new quarterly projections will partly reflect the economic consequences of the war in Iran. In addition, ECB Governing Council member Peter Kazimir remarked that a rate hike may be closer than previously assumed, and that the central bank could respond if the conflict pushes inflation expectations higher.
Swaps pricing now signals that markets foresee the ECB tightening monetary policy more quickly than before. Based on LSEG data, investors currently see a rate increase by the ECB as soon as June.
Looking ahead, market participants are also awaiting the release of the Eurozone Industrial Production data for January later on Friday, which could offer further direction for the EUR/GBP pair.
Snapshot of Key UK January Data
| Indicator | Period | Latest Reading | Previous | Market Expectation |
|---|---|---|---|---|
| GDP | January | 0.0% | 0.1% | 0.2% |
| Index of services (3M/3M) | January | 0.2% | 0% | Not specified |
| Industrial Production (MoM) | January | -0.2% | Not specified | Below consensus |
| Manufacturing Production (MoM) | January | 0.1% | Not specified | Below consensus |
Euro FAQs
What is the Euro?
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% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
What is the ECB and how does it impact the Euro?
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.
How does inflation data impact the value of the Euro?
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.
How does economic data influence the value of the Euro?
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.
How does the Trade Balance impact the Euro?
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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