EUR/GBP extends decline below 0.8450 as UK economy rebounds faster than expected

July 11, 2024 8:42 am

  • EUR/GBP extends the downside near 0.8425 in Thursday’s early European session. 
  • The UK GDP grew 0.4% MoM in May after stagnating in April, better than expected. 
  • Higher bets on the ECB rate cuts weigh on the Euro and cap the cross’s upside. 

The EUR/GBP cross remains on the defensive around 0.8425 during the early European session on Thursday. The cross trades with mild losses after the monthly UK Gross Domestic Product (GDP) data. 

The UK economy grew more than expected in May after stagnating in April, with the GDP expanding at 0.4% MoM. This figure beat market expectations of 0.2% in the reported period, according to National Statistics (ONS) on Thursday. The Pound Sterling (GBP) attracts modest sellers in response to the stronger UK data.

The uncertainty surrounding the Bank of England’s (BoE) decision to begin lowering its borrowing costs from the August meeting has risen. The BoE policymaker Catherine Mann signals caution on rate cuts, warning of a resurgence in UK inflation and rapid increases in service prices. Mann added that uncertainty about wage behaviour in the UK is unlikely to disappear soon, and policy decisions need to be robust to this.

Meanwhile, BoE policymaker Jonathan Haskell said that he does not want to cut interest rates as inflationary pressures remain in the job market and it is unclear how rapidly they will fade. Investors are now pricing in nearly 60% odds that the BoE will cut interest rates on August 1, the first time since 2020. 

On the Euro front, the European Central Bank (ECB) governing council member Fabio Panett said on Tuesday that the ECB can continue to lower interest rates, adding that wage growth, a central driver of inflation, was “not warranted.” Traders raise their bets on an ECB rate cut this year, which might cap the cross’s upside in the near term.

GDP FAQs

A country’s Gross Domestic Product (GDP) measures the rate of growth of its economy over a given period of time, usually a quarter. The most reliable figures are those that compare GDP to the previous quarter e.g Q2 of 2023 vs Q1 of 2023, or to the same period in the previous year, e.g Q2 of 2023 vs Q2 of 2022. Annualized quarterly GDP figures extrapolate the growth rate of the quarter as if it were constant for the rest of the year. These can be misleading, however, if temporary shocks impact growth in one quarter but are unlikely to last all year – such as happened in the first quarter of 2020 at the outbreak of the covid pandemic, when growth plummeted.

A higher GDP result is generally positive for a nation’s currency as it reflects a growing economy, which is more likely to produce goods and services that can be exported, as well as attracting higher foreign investment. By the same token, when GDP falls it is usually negative for the currency. When an economy grows people tend to spend more, which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation with the side effect of attracting more capital inflows from global investors, thus helping the local currency appreciate.

When an economy grows and GDP is rising, people tend to spend more which leads to inflation. The country’s central bank then has to put up interest rates to combat the inflation. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold versus placing the money in a cash deposit account. Therefore, a higher GDP growth rate is usually a bearish factor for Gold price.

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