EUR/GBP trades lower as Eurozone Industrial Production disappoints, UK data awaited

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The Euro (EUR) edges lower against the British Pound (GBP) on Monday amid thin market conditions. At the time of writing, EUR/GBP is trading around 0.8689, remaining confined within its week-old trading range.

EUR/GBP trades lower as soft Eurozone Industrial Production caps upside.
The British Pound steadies as traders position ahead of UK CPI and jobs data.
In the Eurozone, traders eye ZEW Economic Sentiment and German CPI data.

Data released by Eurostat showed that Industrial Production on a seasonally adjusted monthly basis contracted by 1.4% in December, slightly better than the -1.5% forecast but sharply lower than the 0.3% expansion recorded previously, which was revised down from 0.7%.

On an annual working-day adjusted basis, Industrial Production rose 1.2%, missing the 1.3% market expectation and slowing from the prior 2.2% reading.

The data leans mildly dovish, reinforcing the view that the Eurozone’s manufacturing sector remains fragile. However, it is unlikely to materially shift expectations around the European Central Bank's (ECB) monetary policy outlook, with markets widely anticipating that the central bank will keep interest rates on hold through 2026.

Meanwhile, Reuters reported on Saturday that the ECB said potentially “all central banks” outside the Euro area would be allowed to borrow Euros against collateral denominated in the euro zone’s currency.

Under the revamped framework, central banks will be able to borrow up to €50 billion against euro-denominated marketable assets. ECB President Christine Lagarde said the redesigned repo facility strengthens the role of the Euro.

In the UK, traders are awaiting a heavy slate of economic data that could shape near-term interest rate expectations for the Bank of England (BoE).

Employment data is due on Tuesday, followed by Consumer Price Index (CPI) and Producer Price Index (PPI) figures, alongside the Retail Price Index, on Wednesday. Investors are leaning toward a March rate cut from the BoE, with market pricing reflecting about a 65% chance of easing.

In the Eurozone, focus shifts to Tuesday’s ZEW Economic Sentiment survey and Germany’s Consumer Price Index (CPI) data, which could provide fresh direction for EUR/GBP.

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.