EUR/GBP holds gains above 0.8800 following German HICP inflation data
- EUR/GBP maintains its position following German inflation data.
- Germany’s Harmonized Index of Consumer Prices climbed by 2.3% YoY in October, as expected.
- BoE’s Megan Greene expressed doubt that the UK’s monetary policy is sufficiently restrictive.
EUR/GBP extended its gains for the second successive session, trading around 0.8810 during the early European hours on Wednesday. The currency cross remains stronger near 0.8829, the highest since May 2023, reached on November 5, following the release of Consumer Price Index (CPI) and Harmonized Index of Consumer Prices (HICP) data from Germany.
Germany’s Harmonized Index of Consumer Prices rose by 2.3% year-over-year (YoY) in October, matching the market expectations and the prior reading. The monthly HICP inflation remained at 0.3% in the same month. The CPI came in at a 2.3% increase YoY, while monthly inflation remained consistent at 0.3%, as expected.
ECB policymaker Francois Villeroy de Galhau said Wednesday that the French economy remains resilient despite political uncertainty, noting that households save heavily due to concerns over the public deficit. Galhau added that domestic and international uncertainties are weighing about 0.5% on GDP.
The EUR/GBP cross may further appreciate as the Euro (EUR) receives support from a cautious tone surrounding the European Central Bank (ECB) policy outlook. The ECB is expected to keep interest rates unchanged for now, backed by steady economic performance and inflation near target.
Additionally, the EUR/GBP cross gained ground as the Pound Sterling (GBP) struggles against its peers amid growing expectations that the Bank of England (BoE) will cut interest rates in December. Analysts at Morgan Stanley, Citigroup, and UBS Global Research have shifted their stance and expect the BoE to cut interest rates by 25 basis points (bps) to 3.75%.
BoE policymaker Megan Greene stated on Tuesday that she is not convinced the United Kingdom’s (UK) monetary policy is meaningfully restrictive. Greene noted that wage settlement data for next year is higher than desired and expressed concern about persistent inflation in the UK, suggesting that monetary policy may need to be more restrictive. She also emphasized that risk management around inflation should play a key role in shaping the BoE’s policy outlook, per Reuters
German economy FAQs
The German economy has a significant impact on the Euro due to its status as the largest economy within the Eurozone. Germany's economic performance, its GDP, employment, and inflation, can greatly influence the overall stability and confidence in the Euro. As Germany's economy strengthens, it can bolster the Euro's value, while the opposite is true if it weakens. Overall, the German economy plays a crucial role in shaping the Euro's strength and perception in global markets.
Germany is the largest economy in the Eurozone and therefore an influential actor in the region. During the Eurozone sovereign debt crisis in 2009-12, Germany was pivotal in setting up various stability funds to bail out debtor countries. It took a leadership role in the implementation of the 'Fiscal Compact' following the crisis – a set of more stringent rules to manage member states’ finances and punish ‘debt sinners’. Germany spearheaded a culture of ‘Financial Stability’ and the German economic model has been widely used as a blueprint for economic growth by fellow Eurozone members.
Bunds are bonds issued by the German government. Like all bonds they pay holders a regular interest payment, or coupon, followed by the full value of the loan, or principal, at maturity. Because Germany has the largest economy in the Eurozone, Bunds are used as a benchmark for other European government bonds. Long-term Bunds are viewed as a solid, risk-free investment as they are backed by the full faith and credit of the German nation. For this reason they are treated as a safe-haven by investors – gaining in value in times of crisis, whilst falling during periods of prosperity.
German Bund Yields measure the annual return an investor can expect from holding German government bonds, or Bunds. Like other bonds, Bunds pay holders interest at regular intervals, called the ‘coupon’, followed by the full value of the bond at maturity. Whilst the coupon is fixed, the Yield varies as it takes into account changes in the bond's price, and it is therefore considered a more accurate reflection of return. A decline in the bund's price raises the coupon as a percentage of the loan, resulting in a higher Yield and vice versa for a rise. This explains why Bund Yields move inversely to prices.
The Bundesbank is the central bank of Germany. It plays a key role in implementing monetary policy within Germany, and central banks in the region more broadly. Its goal is price stability, or keeping inflation low and predictable. It is responsible for ensuring the smooth operation of payment systems in Germany and participates in the oversight of financial institutions. The Bundesbank has a reputation for being conservative, prioritizing the fight against inflation over economic growth. It has been influential in the setup and policy of the European Central Bank (ECB).