Euro flatlines against British Pound as traders brace for ECB rate decision
- EUR/GBP holds steady around 0.8625 in Wednesday’s early European session.
- ECB is widely expected to raise key rates by 25 bps at its June meeting on Thursday.
- BoE's Taylor sees rates on hold barring a worst-case scenario.
The EUR/GBP cross trades on a flat note near 0.8625 during the early European trading hours on Wednesday. Traders prefer to wait on the sidelines ahead of the European Central Bank (ECB) interest rate decision on Thursday. On Friday, the monthly UK Gross Domestic Product data will provide fresh directions on the Bank of England's (BoE) rate path.
Growing speculation that the ECB will deliver a rate hike at its June policy meeting could provide some support to the Euro (EUR). The ECB is likely to raise the key interest rates for the first time in almost three years on Thursday. This move would make the central bank the first among its major peers to tighten policy in reaction to a surge in energy prices linked to the conflict in the Middle East.
Traders will closely watch the ECB’s press conference after the rate decision. “Lagarde may provide some indication of the ECB’s next move after she muddled communication on the rate outlook in March. We expect her to be clearer than in the past that a second hike may be in the pipeline,” said Simona Delle Chiaie, chief euro-area economist at Bloomberg.
On the UK’s front, Bank of England (BoE) policymaker Alan Taylor said earlier on Monday that interest rates at their current level were restrictive for the economy and he did not see the need for a rate hike to tackle inflationary pressures that have grown as a result of the Iran war. Last week, BoE governor Andrew Bailey stated that the UK central bank is in no rush to raise interest rates while the outcome of the Iran war remains uncertain and the UK’s growth rate stays weak.
Financial markets had expected the Bank of England (BoE) to cut interest rates twice this year to 3.25%. Since the US-Iran war began, the situation has reversed, and now a rise of 25 basis points (bpd) before December is projected, according to CNBC.
Euro FAQs
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%).
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.
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