EUR/GBP holds positive ground above 0.8750, traders brace for ECB rate decision

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EUR/GBP gains ground around 0.8785 in Wednesday’s early European session.
The ECB is expected to hold interest rates steady on Thursday for its third straight meeting.
A significant slowdown in UK shops' price inflation weighs on the Pound Sterling.

The EUR/GBP cross posts modest gains near 0.8785 during the early European session on Wednesday. The Euro (EUR) edges higher against the Pound Sterling (GBP) ahead of the European Central Bank (ECB) later on Thursday. The ECB will likely keep rates on hold again as traders waver on whether it will resume easing next year.

The ECB is expected to leave interest rates unchanged for its third straight meeting as inflation is under control and the long-struggling eurozone economy looks healthier. Traders have priced in around an 80% possibility of a 2026 rate cut, a big shift from September, when the ECB’s hawkish remarks had led markets to price out such a move.

Traders will closely monitor the ECB President Christine Lagarde’s press conference for clues about the path forward. Any hawkish comments from the ECB policymakers could support the EUR against the GBP in the near term.

On the other hand, deeper political uncertainty in France could exert some selling pressure on the EUR. Standard & Poor’s (S&P) Global downgraded France’s rating a notch last week in a surprise update, citing political instability that put the government’s efforts to repair its finances at risk.

Hopes of the Bank of England (BoE) easing monetary conditions have risen as UK retailers have cut their prices in October, weighing on the GBP. Data released by the British Retail Consortium (BRC) earlier on Tuesday showed that UK shop inflation eased to a 1% YoY growth in October, versus 1.4% prior. These figures came after softer-than-expected UK Consumer Price Index figures released last week.

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.

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