- EUR/GBP gains ground to around 0.8665 in Monday’s early European session.
- Potential meeting between the US and Russia underpins the Euro.
- The BoE signaled a cautious easing path, which might help limit the GBP’s losses.
The EUR/GBP cross edges higher to near 0.8665 during the early European session on Monday. The Euro (EUR) gains ground against the Pound Sterling (GBP) amid optimism surrounding a possible meeting between the US and Russia. However, the upside for the cross might be capped due to a hawkish rate cut by the Bank of England (BoE).
The EUR’s appeal has risen from expectations an increase in regional defense spending will support the Eurozone economy. Additionally, potential talks between US President Donald Trump and Russian President Vladimir Putin in Alaska on Friday to end sanctions contributes to the EUR’s upside. Kremlin aide Yuri Ushakov said on Thursday that Trump and Putin would meet in the coming days in what would be the first summit between leaders of the two countries since 2021.
The BoE decided to cut the interest rates from 4.25% to 4.0% at its August meeting on Thursday as the UK central bank resumed what it describes as a “gradual and careful” approach to monetary easing. Four of its nine policymakers sought to keep borrowing costs steady, suggesting the BoE’s run of rate cuts might be nearing an end.
Hawkish rate cuts from the BoE could underpin the GBP and act as a headwind for the cross in the near term. Traders trimmed their bets on the chance of another BoE rate reduction by the end of 2025 and were only fully pricing in a cut to 3.75% in February next year, according to data from LSEG.
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.
