EUR/GBP weakens to near 0.8650 on tariff tensions
- EUR/GBP declines to near 0.8660 in Monday’s early European session.
- The EU is preparing a retaliation plan as trade tensions escalate.
- Weaker UK job data prompted the prospect of a BoE interest rate cut next month.
The EUR/GBP cross loses momentum to around 0.8660 during the early European session on Monday. The Euro (EUR) softens against the Pound Sterling (GBP) due to renewed trade tensions between the United States (US) and the European Union (EU) ahead of the tariff deadline on August 1.
European Union policymakers are scheduled to meet as early as this week to discuss a retaliation plan if no deal is reached with US President Donald Trump, whose tariff negotiating position is seen to have stiffened ahead of an August 1 deadline. Trump was pushing for a tariff of 15% to 20% minimum on all EU goods. Alongside a universal levy, Trump has imposed a 25% duty on cars and auto parts, as well as steel and aluminum. The fears of trade tensions might undermine the shared currency in the near term.
On the other hand, rising expectations that the Bank of England (BoE) could cut the interest rate in August might weigh on the GBP and create a tailwind for the cross. The UK Unemployment Rate ticked higher to 4.7% in the three months to May versus 4.5% prior, the UK Office for National Statistics reported on Thursday. This figure came in below the expectations of 4.6% during the reported period.
Money markets have priced in nearly an 89% chance that the BoE will lower borrowing costs in August, up from an 87% possibility on Wednesday. Analysts expected the UK central bank to deliver two interest rate reductions by the end of the year, which would take the bank rate down to 3.75%.
Euro FAQs
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%).
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.
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.
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.
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.