Euro posts modest losses against British Pound ahead of ECB’s annual forum

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The EUR/GBP cross loses ground to near 0.8625 during the early European trading hours on Monday. Fading additional rate hike expectations from the European Central Bank (ECB) weigh on the Euro (EUR) against the British Pound (GBP). Traders will closely watch the ECB’s annual forum later on Monday.

EUR/GBP softens to around 0.8625 in Monday’s early European session.
ECB’s Lagarde will open the forum on Monday.
UK's Burnham will unveil a plan to shift power from London.

While the ECB raised its deposit rate by 25 basis points (bps) to 2.25% at its June policy meeting, President Christine Lagarde said last week that the central bank does not need to respond aggressively to Middle East conflict spillovers, adding that the inflation shock facing the Eurozone is too large to ignore but not yet large enough to push up longer-term rates.

Financial markets have pared back their bets for further rate hikes amid sliding oil prices. According to ECB Watchtool, traders have priced in a 94.0% probability of no change in rates. ECB President Christine Lagarde will open the forum on Monday. Her remarks could give some clues about evolving central bank policies.

On the other hand, the UK political transition with deteriorating domestic economic data could undermine the GBP and act as a tailwind for the cross. The former Greater Manchester mayor will outline his vision for the United Kingdom (UK) on Monday, per the Guardian.

Keir Starmer last week faced political pressure and announced he would step down as leader of the ruling Labour Party. The schedule to pick a successor could see Burnham installed as Prime Minister as soon as July 17, if no other challenger emerges.

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% off 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.