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20 Dec 2024
EUR/GBP gathers strength to near 0.8300 after UK Retail Sales data
- EUR/GBP holds positive ground to around 0.8300 in Friday’s early European session.
- UK Retail Sales increased 0.2% on a monthly basis in November vs. 0.5% expected.
- Expectations of a more aggressive rate-cut path by ECB might undermine the Euro and cap the upside for the cross.
The EUR/GBP cross drifts higher to near 0.8300 during the early European session on Friday. The Pound Sterling (GBP) weakens after the downbeat UK Retail Sales data.
Data released by the Office for National Statistics on Friday showed that UK Retail Sales rose 0.2% MoM in November versus a 0.7% decline in October. This figure came in below the market consensus of a 0.5% increase. On an annual basis, Retail Sales climbed 0.5% in November, compared to a rise of 2.0% (revised from 2.4%) prior, missing the estimation of 0.8%. The GBP attracts some sellers in an immediate reaction to the downbeat UK Retail Sales and acts as a tailwind for the EUR/GBP cross.
On the Euro front, the European Central Bank (ECB) is likely to continue to lower its key interest rate next year. The ECB Governing Council member Gediminas Simkus said on Thursday that the central bank should keep lowering borrowing costs at the current pace as inflation is increasingly under control. ECB President Christine Lagarde said ECB policymakers would keep cutting interest rates if forthcoming inflation data aligns with anticipations.
The ECB will hold its first rate-setting meeting of 2025 on January 30. Investors envisage a slightly more aggressive path of the ECB easing cycle next year, which might weigh on the Euro against the GBP.
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.