Euro picks up against British Pound with French debt, Oil prices still weighing
- EUR/GBP approaches 0.8500 after bouncing from 0.8447 lows but remains on track for the second consecutive weekly decline.
- Lower French bond yields have given some respite to the Euro, but the high Oil prices remain a heavy weight.
- BoE's Bailey reaffirmed the bank's commitment to bring inflation to target on Thursday.
The Euro (EUR) trims losses against the British Pound (GBP) on Friday, as the bond rout eased, allowing for a mild risk appetite during the Asian session. The EUR/GBP pair trades near 0.8500 at the European session opening, up from the 16-month low at 0.8447 hit earlier this week but still on track for a nearly 1.5% decline on a two-week losing streak.
France’s Government Bond yields have pulled back from multi-decade highs on Friday, giving some respite to the single currency, but remain alarmingly high, as the deadlock in the government hinders any credible savings plan. Against this background, the spreading student protests are making things only worse.
The Governor of the Bank of France, Emmanuel Moulin, came out on Thursday to say that the country does not need help from the European Central Bank (ECB), but these sorts of comments are normally more concerning than reassuring. The Eurozone finance ministers and the ECB urged the French government to approve the 2027 budget as soon as possible to calm markets.
Oil prices above $100 are a headwind to Euro recovery
Beyond that, Crude prices remain high, putting additional pressure on the Euro. Brent Oil trades at the $101.50 area, below Thursday’s highs past $104.00 but still above the key $100 area, a level considered critical for stagflationary risks on the Eurozone’s economies.
In the UK, Bank of England (BoE) Governor Andrew Bailey observed on Thursday that inflation risks are rising as high energy prices persist and reiterated that the central bank is "fully committed to returning inflation to target". These comments feed hopes that the bank may hike interest rates before the end of the year, and provide some support to the Pound.
The calendar on Friday is thin, with the meeting of the Eurozone's Economic and Financial Affairs Council and speeches from ECB Board members Piero Cipollone and Isabel Schnabel as the only events worth mentioning.
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.