EUR/GBP flat lines below 0.8750 as traders brace for German IFO Survey release

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The EUR/GBP cross trades on a flat note near 0.8735 during the early European trading hours on Wednesday. However, the concerns over the economic downturn in France, the second-largest economy within the Eurozone, could weigh on the Euro (EUR) against the Pound Sterling (GBP).

EUR/GBP holds steady around 0.8735 in Wednesday’s early European session.
French economic activity contracted in September.
Concerns about new tax hikes in the UK hit optimism and could undermine the GBP.

Data released on Tuesday showed that the HCOB Flash France Composite Purchasing Managers' Index (PMI) fell to 48.4 in September from 49.8 in August, marking its most severe contraction in five months. This figure came in weaker than the expectation of 49.9. Meanwhile, both the manufacturing and services sectors declined sharply in September.

"That stands in contrast to Germany, where service activity picked up according to the PMI. With heightened political uncertainty, the French economy appears to be mirroring this sense of instability,” said Bert Colijn at ING.

Traders will take more cues from Germany’s IFO business survey for September on Wednesday. The headline IFO Business Climate Index is projected to rise to 89.3 in September from 89.0 in August. If the report shows a better-than-estimated outcome, this could lift the EUR in the near term.

On the other hand, UK businesses reported a loss of momentum and confidence ahead of possible new tax hikes in Finance Minister Rachel Reeves' next budget in November. This, in turn, might exert some selling pressure on the GBP and act as a tailwind for the cross. Last week, public finance figures showed that public sector net borrowing hit £18 billion, the highest for the month in five years. Economists expected government borrowing to come in significantly lower at £12.8 billion.

Euro FAQs

What is the Euro?

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%).

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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