EUR/GBP Cross Strengthens in Early European Session
- The EUR/GBP cross gains momentum to near 0.8330 during the early European session on Friday.
- The Pound Sterling (GBP) weakens after the release of UK Retail Sales data for October.
- Traders await the preliminary Eurozone HCOB Purchasing Managers Index (PMI) and ECB President Lagarde’s speech for fresh impetus.
The EUR/GBP cross has shown strength in the early European session on Friday, reaching close to 0.8330. This movement can be attributed to the weakening of the Pound Sterling (GBP) following the release of UK Retail Sales data for October. As the trading day progresses, market participants are keeping an eye on key economic indicators such as the preliminary Eurozone HCOB PMI and a speech by ECB President Lagarde for potential market-moving insights.
UK Retail Sales Data Disappoints
Data released by the Office for National Statistics (ONS) on Friday revealed a decline of 0.7% MoM in UK Retail Sales for October. This figure fell short of expectations and contrasted with a 0.1% increase (revised from 0.3%) seen in September. Additionally, Retail Sales excluding auto motor fuel sales dropped by 0.9% MoM in October, missing the estimated 0.4% decline. The disappointing retail figures have put pressure on the GBP, contributing to the strength of the EUR/GBP cross.
ECB Speculation Weighs on Euro
On the other hand, the Euro’s upside potential is capped by growing speculation of more aggressive interest rate cuts by the European Central Bank (ECB). ECB policymakers have hinted at potential rate cuts, with discussions of a 0.25% reduction in December and further cuts in 2025. This sentiment is reinforced by calls for faster interest rate adjustments to support the Eurozone economy. However, uncertainties remain regarding the ECB’s commitment to long-term monetary policy strategies.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger 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.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.