Euro Holds Tight Range vs Pound as UK Growth Stalls

Key Moments

EUR/GBP Drifts Lower After Data From UK and Germany

EUR/GBP edged down after two consecutive sessions of advances, trading around 0.8630 during Asian hours on Friday. The cross remained soft in the wake of fresh economic releases from both the United Kingdom and Germany.

UK Growth Softens as Output Data Send Mixed Signals

Latest UK figures showed that Gross Domestic Product (GDP) fell by 0.1% month-on-month in April, exactly in line with market projections, after a 0.3% expansion in March. The April Index of Services rose 0.8% on a three-month-on-three-month basis, unchanged from the 0.8% increase seen in March.

Industrial Production for April registered 0% month-on-month, indicating flat output, while Manufacturing Production climbed 0.4% over the same period.

Money market pricing reflected expectations for at least a 25-basis-point interest rate hike by the Bank of England (BoE) in September, with a notable chance of a further increase before year-end. This anticipated tightening is unfolding against a challenging domestic backdrop, with political uncertainty surrounding the Labour Party’s leadership cited as a factor dampening investor confidence and intensifying the ongoing downturn.

German Inflation Prints In Line With Projections

In the Eurozone, inflation data out of Germany came in as expected. The revised Harmonized Index of Consumer Prices (HICP) for May stood at 2.7% year-on-year. On a monthly basis, HICP slipped by 0.1%, indicating a slight contraction in price levels compared with the prior month.

ECB Signals Prolonged Restrictive Stance After Rate Hike

The European Central Bank (ECB) implemented what was described as aggressive action on Thursday, lifting interest rates for the first time in nearly three years. The ECB also indicated that its hawkish approach is likely to persist, suggesting that restrictive monetary settings are expected to stay in place through 2027.

Background: Euro and ECB Policy Framework

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%).

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 Inflation and Data Releases Influence 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.

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.

Trade Balance and Its Role for 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.