Euro remains steady against British Pound Gains due to ECB rate hike bets
- Euro may gain support as markets have fully priced in a 25 basis point rate hike to 2.5% on Thursday.
- Surging energy prices driven by the US-Iran conflict are fueling the European Central Bank's expected decision.
- BoE Governor Bailey stressed that global conflicts are driving energy prices higher, keeping UK inflation risks elevated.
EUR/GBP remains steady after experiencing volatility, hovering around 0.8580 during European hours on Wednesday. However, the currency cross may gain ground as the Euro (EUR) could receive support ahead of the looming European Central Bank (ECB) monetary policy decision.
The ECB is widely expected to hike interest rates at its September policy meeting on Thursday, driven by surging energy prices due to the ongoing US-Iran conflict. Traders have fully priced in a 25-basis-point (bps) move to 2.5% as the latest data shows Eurozone inflation rose back above 3% in August.
ING's global head of macro Carsten Brzeski said, "We expect the ECB to hike rates by 25 basis points. Another insurance rate hike." "Or for those who don’t like this term: a dovish rate hike," Brzeski added.
Bailey flags upside inflation risks as energy shock keeps Pound on edge
FXS Speechtracker shows a 7.2/10 score versus a 6/10 historic average, signalling a more hawkish Bank of England (BoE) Governor Andrew Bailey than usual as upside inflation risks dominate the message. By stressing that the U.S.–Iran war and Ukrainian attacks on Russian refineries are driving energy and refined product prices higher, Bailey underlines a persistent cost-push threat that keeps UK inflation risks skewed to the upside and supports Pound resilience on dips.
The warning that UK mortgage rates have risen more than almost anywhere in the G7 acknowledges tightening already in the system, but Bailey’s comment that market rate curves reflect concern about further energy price rises reinforces a bias toward staying restrictive for longer. The attempt to dispel the idea of a “secret plan” to hike rates does little to offset the overall hawkish tone, leaving markets inclined to price out aggressive BoE cuts and to favor the Pound against lower-yielding peers.
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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