EUR/GBP drifts higher to near 0.8750 on UK fiscal concerns
- EUR/GBP gathers strength to around 0.8745 in Friday’s early European session.
- Markets priced in ECB to hold interest rates steady until at least December 2025.
- BoE’s Greene favoured caution on rate cuts.
The EUR/GBP cross extends the rally to near 0.8745 during the early European trading hours on Friday. The Euro (EUR) strengthens against the Pound Sterling (GBP) as traders expect an end to the current rate-cutting cycle from the European Central Bank (ECB). Later on Friday, the ECB policymakers Piero Cipollone and José Luis Escrivá are scheduled to speak.
According to a Reuters poll, a significant majority of economists surveyed expected the ECB to keep rates unchanged for the remainder of the year. Rising expectations that the ECB is done cutting rates could support the shared currency against the GBP. However, some financial institutions anticipate further cuts later this year or in early 2026 if conditions warrant. The ECB emphasized a data-dependent, meeting-by-meeting approach and is not pre-committing to a specific rate path.
UK businesses reported a loss of momentum and confidence ahead of possible new tax hikes in Finance Minister Rachel Reeves' next budget in November, which might drag the GBP lower and act as a tailwind for the cross.
Investors await fresh cues on whether the Bank of England (BoE) will cut interest rates in the remainder of the year. BoE policymaker Megan Greene said on Wednesday that risks have grown that inflation in the UK will prove stronger than the UK central bank has forecast, meriting a cautious approach to further interest rate cuts. BoE Governor Andrew Bailey last week emphasized a “gradual and careful” monetary easing approach. The cautious tone of the BoE might help limit the GBP’s losses in the near term.
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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