Euro dips further against the British Pound, weighed by higher Oil prices
- EUR/GBP extends losses for the second consecutive day to test support at the 0.8560 area.
- Higher Oil prices and the complex status of the Strait of Hormuz are weighing on the Euro.
- Rabobank analysts see market concerns about the UK's budget and overestimated BoE tightening views likely to weigh on the Pound.
The Euro (EUR) posts mild losses against the British Pound (GBP) on Monday, with the EUR/GBP pair testing Friday’s lows at 0.8560, as the situation in the Middle East muddles and Crude prices tick up, adding pressure on the Eurozone’s Oil-importing economies.
Weapons remain silent in Iran, but an ever-growing confusion surrounds the negotiating process, pushing back hopes of a swift end to the conflict. US President Donald Trump said on Monday that he is “semi-negotiating” with Tehran while Iran affirmed that an agreement with Oman to define new shipping lines through the Strait of Hormuz is near, although the reopening will depend on the US meeting some conditions.
Meanwhile, sea traffic through the key waterway remains reduced to a trickle, and Brent Oil prices returned to levels near $83.00, about 6.5% above last week’s lows.
RaboBank analysts favour buying on EUR/GBP dips
Looking from a wider perspective, analysts at Rabobank see “a re-pricing in policy expectations towards steady policy from the BoE this year combined with the prospect of nervousness ahead of the October budget suggests scope for downside pressure on the pound as the summer draws to a close.”
Against this backdrop, Rabobank reiterates a preference for the Euro over the Pound, stating: “We favour buying EUR/GBP on dips to the 0.8550 area. A break above the recent high in the 0.8588 region could increase upside potential.”
The calendar on Monday is thin, with only the Eurozone Sentix Investors Confidence Index worth mentioning. On Wednesday, Germany’s inflation figures and Thursday’s UK Gross Domestic Product and Eurozone Industrial Production data are expected to confirm the pair’s near-term direction.
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.
