Euro drifts lower against British Pound ahead of Germany's inflation data, BoE's Bailey speech

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The EUR/GBP cross trades with mild losses near 0.8660 during the early European trading hours on Friday. Uncertainty surrounding the US-Iran peace deal is causing broader market fluctuations. The preliminary readings of Germany’s inflation will be the highlights later on Friday.

EUR/GBP declines to around 0.8660 in Friday’s early European session.
The ECB is widely anticipated to hike its deposit facility rate by 25 bps in June.
Traders trimmed wagers on the extent of rate hikes from the BoE this year.

The US officials said that Washington and Tehran have reached an agreement on a memorandum of understanding (MoU) to extend the ceasefire for 60 days to allow for formal negotiations, but US President Donald Trump has yet to give his approval.

Markets are now pricing in a high probability of around 91% of a 25 basis point (bps) interest rate hike at the European Central Bank’s (ECB) next meeting on June 11, which would take the bank’s key deposit facility rate to 2.25%, and a 50% odds of another rate rise later this year in September, according to CNBC.

ECB Executive Board member Isabel Schnabel said that the central bank should raise interest rates next month even if there’s a quick resolution to the conflict in the Middle East.

The British Pound (GBP) might face some selling pressure following weaker UK economic data and fears over rising energy costs. Traders are increasingly concerned that prolonged energy shocks stemming from geopolitical tensions in the Strait of Hormuz will heavily dent UK consumer spending and limit how aggressively the Bank of England (BoE) can tighten policy.

“Traders now price one rate hike fewer in 2026 than at the end of the previous week, and gilt yields saw the biggest weekly drop since late-2023,” Pantheon Macroeconomics said in a note on Tuesday. “We estimate that lower yields were driven by lower oil prices, a fall in betting-market odds on Sir Keir Starmer being replaced, and Andy Burnham committing to maintain current fiscal rules,” they added.

BoE Governor Andrew Bailey, Catherine Mann, and Megan Greene are set to speak later this week. Any hawkish comments from policymakers could help limit the GBP’s losses 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.