EUR/GBP holds steady above 0.8400, upside potential appears due to German Debt Agreement
- EUR/GBP may strengthen following Germany's agreement on a debt overhaul and a substantial increase in state spending.
- ECB Vice President Guindos noted that President Trump’s policies are contributing to greater economic uncertainty than the COVID-19 crisis.
- The Bank of England is widely expected to maintain its interest rate at 4.5% in its policy decision on Thursday.
EUR/GBP remains stable around 0.8410 during early European trading hours on Monday, following gains in the previous session. The cross's upside potential is bolstered by support for the Euro (EUR) after Germany reached a deal on debt reform and a substantial increase in state spending.
On Friday, incoming Chancellor Friedrich Merz secured an agreement with the Green and Social Democrat parties ahead of a crucial parliamentary vote on Tuesday to revise borrowing rules. If the proposal secures a two-thirds majority, the expanded spending plan could significantly boost the EUR/GBP cross.
Meanwhile, European Central Bank (ECB) Vice President Luis de Guindos voiced concerns on Sunday, stating that President Trump's policies are creating greater economic uncertainty than the COVID-19 crisis, according to Bloomberg. Guindos noted that the new US administration appears less inclined toward multilateralism, which fosters international cooperation—an approach shift that he described as a major source of instability.
Additionally, ECB Governing Council member and Banque de France Governor François Villeroy de Galhau emphasized the need for the Euro to strengthen its global influence. In an interview with *La Tribune Dimanche* over the weekend, he called for the establishment of a "powerful savings and investment union" to attract international investors to the Euro.
The EUR/GBP cross is benefiting from a weaker Pound Sterling (GBP) following Friday’s disappointing UK Gross Domestic Product (GDP) report. The data showed an unexpected 0.1% month-over-month contraction in January, falling short of market expectations for a 0.1% expansion. This decline was primarily driven by weakness in the production sector.
Last month, the Bank of England (BoE) lowered its first-quarter growth forecast to 0.1%, down from the 0.4% projection in November. Investors are now focused on the BoE’s monetary policy decision on Thursday, where interest rates are expected to remain unchanged at 4.5%.
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.
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