EUR/GBP drifts higher to near 0.8750 as UK inflation drop boosts BoE rate cut odds

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EUR/GBP edges higher to around 0.8745 in Thursday’s early European session.
UK inflation hit its lowest in nearly a year, strengthening bets on a BoE rate reduction.
ECB’s Lagarde planned to leave her job early, ahead of next year's French presidential election, per Reuters.

The EUR/GBP cross gains momentum near 0.8745 during the early European trading hours on Thursday. The Pound Sterling (GBP) weakens against the Euro (EUR) amid weak economic data from the United Kingdom (UK). The UK Retail Sales and preliminary reading of the Eurozone Gross Domestic Product (GDP) will be in the spotlight later on Friday.

The cooling labor market data and signs of softer inflation in the UK may prompt the Bank of England (BoE) to consider further interest rate cuts later this year, even though it held the rate at 3.75% in its February policy meeting.

The UK Consumer Price Index (CPI) rose 3.0% YoY in January, compared to an increase of 3.4% in December, the Office for National Statistics showed on Wednesday. The figure registered its lowest since March last year and came in line with the market consensus of 3.0%. The Core CPI, which excludes the volatile prices of food and energy, climbed 3.1% YoY in January, versus 3.2% prior, matching the expectation.

The UK inflation report added to expectations of an interest rate cut soon by the UK central bank, weighing on the GBP and acting as a tailwind for the cross. Interest rate futures priced in almost 90% odds on a March rate cut by the BoE, up from around 80% before the data, according to Reuters.

On the Euro front, the speculation that European Central Bank (ECB) President Christine Lagarde might step down before her term officially concludes in October 2027 might trigger volatility in the EUR. The move might allow French President Emmanuel Macron and German Chancellor Friedrich Merz to select her successor. However, the ECB has explicitly stated that no decision has been made.

(This story was corrected on February 19 at 09:00 GMT to specify that ECB President Lagarde's term officially concludes in October 2027.)

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.