• EUR/GBP approaches 0.8400 after bouncing from 17-month lows at 0.8361 on Friday.
• News thst Qatar is brokering a new peace plan between the US and Iran has allowed a moderate decline in Oil prices.
• Markets are also celebrating thst France's debt spared a Moody's downgrade over the weekend.

The Euro (EUR) bounces up against the British Pound (GBP) on Monday, favoured by a somewhat brighter market sentiment, as Oil prices retreat from six-month highs and France’s debt rating spared a downgrade over the weekend. The EUR/GBP pair trades a few pips below 0.8400 at the European session opening times, up from Friday’s low, at 0.8361, and following a 2.7% selloff in the previous four weeks.

The Euro is drawing support from a moderate reversal in Oil prices, amid news that Qatari mediators arrived in Tehran on Sunday, as part of a US-coordinated initiative to de-escalate tensions in the region.

Brent Oil prices have pulled back to 110.25 at the time of writing from nearly six-month highs at 1.12.88 on Friday. These levels are still far too high for the Eurozone’s net-importing economies, but hopes that these efforts might help to avoid a further escalation of the conflict are already weighing on the safe-haven USD and buoying the Euro across the board.

Moody's maintains France's credit rating despite the ongoing riots

Beyond that, Moody’s ratings agency kept France’s debt rating unchanged at Aa3 despite the ongoing riots in some of the country’s major cities. The decision has been welcomed by the market, which had anticipated a downgrade. France’s Treasury yields retreated sharply at the week's opening, providing additional support to the Euro.

On the macroeconomic front, the highlight on Monday will be the German IFO Business Climate release, although investors are likely to look from the sidelines, awaiting the European Central Bank's (ECB) monetary policy decision, due on Thursday. The Bank of England’s (BoE) time comes next week, and markets are bracing for a quarter-point rate hike. This is highly likely to keep Pound bears subdued this week.

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.

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.