The EUR/GBP cross loses ground to around 0.8565 during the early European trading hours on Thursday. Fading expectation that the European Central Bank (ECB) will raise the interest rates this year weweighsn the Euro (EUR) against the British Pound (GBP). Traders brace for the speeches from ECB President Christine Lagarde and Bank of England (BoE) Governor Andrew Bailey later on Friday.
Signs of softer inflation in the Eurozone have eased pressure on the ECB to hike rates at its next policy meeting on July 23. Morgan Stanley economists said softer Eurozone June inflation could also “lower the bar a touch for the ECB to be on hold in September,” adding that energy pressures likely had a “limited” direct impact on eurozone prices.
Eurozone inflation, as measured by the Harmonized Index of Consumer Prices (HICP), dropped to 2.8% YoY in June from 3.2% in May, according to Eurostat on Wednesday. This figure came in below the consensus of 3.0%.
UK likely next Prime Minister Andy Burnham’s commitment to fiscal rules calms traders’ nerves, boosting the GBP. Burnham vowed on Monday to deliver radical change to the nation’s politics by handing more power to its regions and by encouraging collaboration over argument in a 10-year mission to spur “good” growth.
Natixis analysts said while Burnham’s commitment to fiscal discipline offers near-term support, markets will closely monitor future budgets for any signs that fiscal rules are being relaxed to finance higher public spending.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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