EUR/GBP strengthens to near 0.8700, eyes on ZEW surveys
- EUR/GBP gathers strength around 0.8690 in Tuesday’s early European session.
- Downbeat UK GDP data raise concerns over ballooning fiscal risks, weighing on the Pound Sterling.
- The EU threatened retaliatory tariffs on US goods after Trump’s surprise 30% tariffs.
The EUR/GBP cross trades in positive territory for the third consecutive day near 0.8690 during the early European session on Tuesday. The Pound Sterling (GBP) weakens against the Euro (EUR) as the UK Gross Domestic Product (GDP) shrank for a second consecutive month in May, raising concerns over ballooning fiscal risks. Traders brace for the ZEW Survey from Germany and the Eurozone, which are due later on Tuesday.
The UK economy unexpectedly contracted again in May, declining 0.1% month-on-month in May, data showed on Friday. Economists expect growth to slow in the rest of the year amid a weaker jobs market and ongoing economic uncertainty, while the Bank of England (BoE) forecasts a lackluster 1% growth rate in 2025. Money markets are now pricing in a nearly 80% possibility of an August cut. These downbeat UK economic data and rising BoE rate cut bets could weigh on the GBP and create a tailwind for the cross in the near term.
On the Euro front, renewed trade tensions between the US and the European Union (EU) might cap the upside for the EUR. The Wall Street Journal reported on Tuesday that the bloc is preparing tariffs on US goods, including aircraft, alcohol, coffee, and medical devices worth 72 billion euros ($84 billion) in case no trade deal is reached by August 1. This action came after Trump threatened to impose a 30% tariff on imports from the EU and Mexico beginning early August.
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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