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Euro trades slightly higher against British Pound but remains rangebound amid market caution
- EUR/GBP rebounds from 0.8350 lows towards a second weekly gain.
- Higher oil prices constrain the Euro’s advance despite support from hawkish ECB remarks.
- Persistently high price pressures are confirmed by inflation data across Eurozone member states.
Holding above 0.8350, EUR/GBP is heading for a second successive weekly gain, with the Euro (EUR) edging higher against the British Pound (GBP) on Friday. Risk appetite is weakening as prospects for a Middle East peace agreement fade and oil recovers from two-month lows. Nevertheless, the pair appears unable to push beyond 0.8370, leaving the wider downtrend intact.
With diplomatic efforts to end the Middle East conflict making no progress, investors have lost their appetite for risk on Friday. Hopes of a breakthrough suffered another setback on Thursday when US President Donald Trump said that “we do not need a deal with Iran”. Tehran, meanwhile, maintained conditions that the US had already rejected as unacceptable.
Recovering oil prices weigh on the Euro
Brent Oil rose 3.7% on Thursday to just above $95.00 as expectations of a rapid end to the conflict receded, before slipping to $94.15 on Friday. Although crude remains about 17% below last week’s highs, fears that conditions in the Middle East may deteriorate before improving are likely to underpin oil prices and restrict the Euro’s gains.
Earlier on Friday, policymakers at the European Central Bank (ECB) again voiced concern over elevated inflation pressures. Their remarks strengthened the argument for a December rate rise and provided support for the Euro.
German wholesale price inflation reached an annual rate of 8.8% in October, up from 8.7% in September, though the monthly figure indicated some easing. Elsewhere in the economic data, France’s Consumer Price Index (CPI) slowed more than forecast, whereas Spanish inflation was unchanged. Both countries’ readings remained well above the ECB’s 2% target.
With little on Friday’s UK economic calendar, the NIESR Gross Domestic Product (GDP) Estimate, scheduled for later in the day, is the only release of note. It is not expected to materially affect the Pound.
Euro essentials
Used by the 20 European Union countries within the Eurozone, the Euro ranks behind only the US Dollar among the world’s most actively traded currencies. Its share of all foreign exchange transactions stood at 31% in 2022, with average daily turnover exceeding $2.2 trillion. An estimated 30% of all transactions involve EUR/USD, making it the world’s most traded currency pair. Next come EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).
Based in Frankfurt, Germany, the European Central Bank (ECB) serves as the Eurozone’s central bank, setting interest rates and overseeing monetary policy. Maintaining price stability is its principal mandate, whether through curbing inflation or encouraging growth. Changes to interest rates are its main policy instrument. The Euro generally benefits from relatively high rates, or expectations of an increase; the reverse also applies. Monetary policy is determined by the ECB Governing Council at eight meetings each year. The decision-makers comprise the heads of the Eurozone’s national central banks and six permanent members, among them ECB President Christine Lagarde.
Measured using the Harmonised Index of Consumer Prices (HICP), Eurozone inflation is a key economic indicator for the Euro. A stronger-than-expected rise in inflation, particularly beyond the ECB’s 2% target, requires the central bank to increase interest rates to bring price pressures under control. When interest rates are relatively high compared with those elsewhere, the Euro usually benefits, as the region becomes a more appealing destination for global investors’ funds.
By revealing the economy’s condition, data releases can move the Euro. GDP figures, manufacturing and services PMIs, employment statistics and consumer sentiment surveys can all help determine the single currency’s direction. Economic strength supports the Euro by drawing in greater foreign investment and potentially prompting the ECB to raise interest rates, which directly strengthens the currency. Weak economic figures, by contrast, are likely to lead to a decline in the Euro. Particular weight attaches to releases from Germany, France, Italy and Spain, the euro area’s four largest economies, which together represent 75% of the Eurozone economy.
The trade balance is another important release for the Euro, showing the difference between a country’s export earnings and its import spending over a specified period. Strong foreign demand for a country’s exports creates additional demand for its currency as overseas buyers seek to purchase those goods, thereby increasing its value. A net trade surplus therefore strengthens a currency, while a deficit has the opposite effect.
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