The EUR/GBP exchange rate continued its downward trend, hovering around 0.8460 during early European trading on Tuesday. The Euro’s decline is driven by concerns over sluggish growth in the Eurozone, which has fueled speculation about additional rate cuts by the European Central Bank (ECB) in September. Market focus is now on the forthcoming inflation data for Germany and the Eurozone, scheduled for release later this week.
On Tuesday, the Federal Statistics Office of Germany reported that the German Gross Domestic Product (GDP) for the second quarter (Q2) matched expectations. The economy contracted by 0.1% quarter-over-quarter in Q2, consistent with the previous reading. Year-over-year, the GDP remained unchanged compared to Q2 2023. The immediate reaction to the German GDP report saw the Euro come under further selling pressure.
ECB Governing Council member Olli Rehn indicated last week that the slowdown in inflation and the broader economic weakness in the Eurozone support the case for reducing borrowing costs next month. Market participants are anticipating a 25 basis points (bps) cut in the ECB’s benchmark interest rates at its September meeting, which could exert additional downward pressure on the Euro in the near term.
Meanwhile, Bank of England (BoE) Governor Andrew Bailey expressed “cautious optimism” regarding inflation on Friday, though he cautioned that declaring victory over inflation is premature. Expectations that the UK central bank‘s policy-easing will be more gradual compared to other major central banks are providing support to the Pound Sterling (GBP), acting as a counterbalance to the Euro and contributing to the EUR/GBP’s decline.
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