EUR/GBP trades flat below 0.8800, Eurozone HICP data in focus

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The EUR/GBP cross holds steady near 0.8785 during the early European trading hours on Tuesday. Traders prefer to wait on the sidelines ahead of the preliminary reading of the Harmonized Index of Consumer Prices (HICP) from the Eurozone later on Tuesday.

EUR/GBP flat lines around 0.8785 in Tuesday’s early European session.
The UK Autumn budget report keeps the door open for a BoE rate cut.
ECB’s Nagel said interest rates are currently in a ‘good place.’

Softer UK inflation, a cooling labor market, and the Autumn November budget have reinforced expectations for a December rate cut from the Bank of England (BoE). In the budget report, Chancellor of the Exchequer Rachel Reeves announced that the government will raise taxes by 26 billion pounds by 2029-30 to fill the fiscal gap. Analysts' projections now indicate a high likelihood of a rate reduction to 3.75% this month, which could undermine the Pound Sterling (GBP) and act as a tailwind for the cross.

The cautious stance from the European Central Bank (ECB) signals that the ECB is done cutting interest rates, providing some support to the Euro. ECB President Christine Lagarde noted that borrowing costs are at the "right level." Additionally, ECB Governing Council member Joachim Nagel stated that he’s comfortable with the monetary policy settings. ECB policymakers are prepared for their last meeting of the year, with analysts expecting rates to remain unchanged for the fourth consecutive time.

The flash reading of the Eurozone HICP will take center stage on Tuesday. The headline HICP is expected to show an increase of 2.1% YoY in November, while the core HICP is estimated to show a rise to 2.5% during the same period. If the report shows softer-than-expected inflation in the Eurozone, this could exert some selling pressure on the EUR against the GBP in the near term.

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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