EUR/GBP holds positive ground above 0.8700 as political crisis in France eases

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EUR/GBP drifts higher to around 0.8705 in Friday’s early European session.
The French government survived a no-confidence vote in Parliament on Thursday.
The UK economy expands by 0.1% MoM in August ahead of the key budget.

The EUR/GBP cross trades on a stronger note near 0.8705 during the early European session on Friday. The Euro (EUR) edges higher against the Pound Sterling (GBP) after the French government survived a no-confidence vote. Traders brace for the speeches from the Bank of England (BoE) policymakers, including Huw Pill and Megan Greene, later on Friday.

French Prime Minister Sebastien Lecornu survived two no-confidence votes in parliament after separate motions were lodged against him. Lecornu’s survival gave France a moment to breathe after weeks of political turmoil that plunged the country into deep uncertainty over its future and weighed on its economy. This, in turn, provides some support to the EUR against the GBP.

The upside for the cross might be limited amid signs of recovery in the manufacturing sector and a slight Gross Domestic Product (GDP) growth, which might underpin the GBP. However, the relief is expected to be temporary as the UK government prepares to unveil the Autumn Budget next month, which will likely raise taxes to support day-to-day operations.

The Office for National Statistics (ONS) reported that the UK economy grew by 0.1% MoM in August, compared to a contraction of 0.1% in the previous reading. This figure came in line with the expectation. Meanwhile, the Industrial Production rose by 0.4% on a monthly basis versus -0.4% prior, faster than estimates of 0.2%.

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.