- EUR/GBP extends losing streak as British Pound shows strength on stable political conditions in the UK.
- This unexpected growth in the UK economy has reduced the likelihood of a BoE rate cut in August.
- The Euro could gain ground as concerns about a financial crisis in France ease.
The EUR/GBP continues its losing streak for the third consecutive session, trading around 0.8410 during European hours on Friday. The British Pound (GBP) is showing significant strength against its major peers following the outright victory of Keir Starmer’s Labour Party in the parliamentary elections, leading to the most stable political conditions in the UK.
The outlook for the British Pound has improved as a stable government results in predictable fiscal policies, attracting significant foreign capital flows. Furthermore, the new UK Chancellor, Rachel Reeves, is committed to stimulating growth and investment with a primary focus on the supply side due to the limited scope of government spending.
In May, UK Gross Domestic Product (GDP) expanded by 0.4% month-on-month, beating market expectations for a 0.2% increase. This unexpected growth has diminished the likelihood of an August rate cut by the Bank of England (BoE). Moreover, BoE Chief Economist Huw Pill stressed that while a rate cut remains a possibility, concerns about high services prices and wage growth remain, according to Reuters.
In Europe, the Euro has found support amid easing concerns about a financial crisis in France following the failure of Marine Le Pen’s far-right National Rally party to maintain dominance over the centrist alliance of French President Emmanuel Macron and the left-wing Popular Front led by Jean-Luc Mélenchon.
In addition to easing fears of a financial crisis in France, diminishing expectations of consecutive rate cuts by the European Central Bank (ECB) have stabilized demand for the Euro. Traders are reducing bets on consecutive ECB rate cuts as policymakers are hesitant to commit to a specific path of rate reductions, concerned that an aggressive approach could reignite inflationary pressures.
UOB Group FX analysts Quek Ser Leang and Peter Chia suggest that the EUR/USD pair is likely to trade within a range of 1.0845 to 1.0900. They anticipate a continued upward move in the Euro, although reaching 1.0915 could take some time.
Euro FAQs
The Euro is the currency of the 20 European Union countries that belong to the Eurozone. It is the second most traded currency in the world, behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily volume of over $2.2 trillion per day. EUR/USD is the most traded currency pair in the world, accounting for an estimated 30% of all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
The European Central Bank (ECB), based in Frankfurt, Germany, is the reserve bank of the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s main mandate is to maintain price stability, which means controlling inflation or stimulating growth. Its main instrument is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher rates – generally benefit the Euro and vice versa. The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of the national banks of the Eurozone and six permanent members, including ECB President Christine Lagarde.
Eurozone inflation data, as measured by the Harmonised Index of Consumer Prices (HICP), is an important econometric data point for the euro. If inflation rises more than expected, especially if it exceeds the ECB’s 2% target, the ECB is forced to raise interest rates to bring inflation back under control. Relatively high interest rates compared to their peers usually benefit the euro, as it makes the region more attractive as a place for global investors to park their money.
Data releases measure the health of the economy and can influence the Euro. Indicators such as GDP, manufacturing and services PMIs, employment and consumer sentiment surveys can 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 can encourage the ECB to raise interest rates, which will directly strengthen the Euro. Conversely, if economic data is weak, the Euro is likely to fall. Economic data from the four largest Eurozone economies (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone economy.
Another important output 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 during a given period. If a country produces highly sought-after export products, its currency will appreciate due to the additional demand created by foreign buyers who wish to purchase these goods. Therefore, a positive net trade balance strengthens a currency and vice versa for a negative balance.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
