EUR/GBP flattens above 0.8500 while BoE’s Bailey warns of UK labor market risks
- EUR/GBP juggles around 0.8525 as investors are expected to reassess their expectations for the BoE’s monetary policy outlook.
- BoE’s Bailey warned of labor market risks due to an increase in employer’s contribution to National Insurance (NI).
- ECB’s Lane stated that the Eurozone inflation is very much in control.
The EUR/GBP pair trades flat around 0.8525 during European trading hours on Wednesday. The cross flattens as market experts reassess their expectations for the Bank of England’s (BoE) monetary outlook for the remainder of the year amid growing concerns over United Kingdom’s (UK) job market.
On Tuesday, BoE Governor Andrew Bailey stated in his testimony before the Lords Economic Affairs Committee on Tuesday that the centra bank has started seeing “labour market softening, and wage settlements are likely to come off," Bailey said. He added that the increase in employers’ contribution to social security schemes seems to be “affecting labour market”.
Theoretically, increasing concerns over job growth paves the way for more interest rate cuts from the BoE. The labor market data for three months ending April also showed that the ILO Unemployment Rate accelerated to 4.6%, the highest level in the jobless rate seen since July 2021.
Meanwhile, investors await the revised Q1 Gross Domestic Product (GDP) data, which will be released on Friday. The Office for National Statistics (ONS) is expected to stay with their preliminary estimates that the economy expanded at a 0.7% pace.
In the Eurozone region, investors await the preliminary Harmonized Index of Consumer Prices (HICP) data for June for bloc’s major regions, which will provide cues about whether the European Central Bank (ECB) will continue reducing interest rates.
On Tuesday, ECB’s chief economist Philip Lane expressed confidence that inflation is broadly under control and the central bank will majorly look for “material” changes in inflation in its next moneatry policy meeting, which is scheduled in July.
Meanwhile, ECB officials are expected to face downside economic risks considering uncertainty surrounding the tariff policy imposed by United State (US) President Donald Trump.
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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