The EUR/GBP cross trades with mild gains around 0.8715 during the early European session on Friday. The Pound Sterling (GBP) weakens against the Euro (EUR) after the downbeat UK economic data. The attention will shift to the preliminary reading of the Eurozone Gross Domestic Product (GDP) for the fourth quarter (Q4), which will be released later on Friday.
The UK economy grew less than forecast in Q4 as business investment shrank and services stagnated, weighing on the Pound Sterling and acting as a tailwind for the cross. The UK Gross Domestic Product rose 0.1% QoQ in Q4, the Office for National Statistics showed on Thursday. This figure followed a growth of 0.1% in Q3 and fell short of the estimation of 0.2%. On a monthly basis, the UK economy expanded 0.1% in December.
The Bank of England’s (BoE) Deputy Governor Sarah Breeden said on Thursday that an interest rate cut could come in the next couple of meetings if inflation continues to ease and no new economic shocks emerge.
On the Euro front, traders raise their bets that the European Central Bank (ECB) will hold its benchmark interest rate steady at 2.0% all year before possible rate hikes next year, which could provide some support to the shared currency. The Eurozone GDP is estimated to grow 0.3% and 1.3% on a quarterly and annual basis, respectively, in Q4. Any signs of weakening in the Eurozone economy could undermine the EUR against the GBP 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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