Euro edges higher against British Pound amid UK political uncertainty
- EUR/GBP edges higher to near 0.8670 in Monday’s early European session.
- UK PM Starmer was considering his political future after rival Andy Burnham's decisive election victory in parliament.
- UK Retail Sales climbed 3.2% YOY in May, beating expectations.
The EUR/GBP cross gathers strength to around 0.8670 during the early European trading hours on Monday. The British Pound (GBP) weakens against the Euro (EUR) due to political uncertainty in the United Kingdom (UK). European Central Bank (ECB) President Christine Lagarde is scheduled to speak later in the day. The preliminary readings of Purchasing Managers Index (PMI) from Germany, the Eurozone, and the UK will be highlighted later on Tuesday.
UK Prime Minister Sir Keir Starmer is expected to resign to make way for a new leader. It came as cabinet ally Peter Kyle said the UK leader was considering "political realities" after Andy Burnham's victory in the Makerfield by-election last week cleared a path for him to challenge for the Labour leadership.
“Markets will be focused on Burnham’s views on fiscal policy and whether there will be any relaxation of the current fiscal rules,” said Commonwealth Bank of Australia strategists, including Kristina Clifton. “A loosening in fiscal rules would likely be poorly received by the UK bond market" and weigh on the pound, they said.
Nonetheless, hotter-than-expected UK Retail Sales data might cap the downside for the GBP. UK Retail sales rose 3.2% year-on-year in May, versus 0.1% prior, the Office for National Statistics (ONS) showed on Friday. This figure beat market expectations of a 1.9% annual increase. On a monthly basis, Retail sales increased 1.2% in May, following a revised 1% decline in April.
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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