EUR/GBP gathers strength above 0.8550 ahead of Eurozone/UK PMI releases
- EUR/GBP strengthens to around 0.8570 in Monday’s early European session.
- Weaker-than-expected UK Retail Sales continue to undermine the Pound Sterling and create a tailwind for the cross.
- The ECB signaled a pause in rate cuts despite low inflation.
The EUR/GBP cross trades in positive territory near 0.8570 during the early European trading hours on Monday. The Pound Sterling (GBP) weakens against the Euro (EUR) as UK Retail Sales declined more than expected in May. Traders will keep an eye on the preliminary reading of the Purchasing Managers Index (PMI) for June from the Eurozone and the United Kingdom, which will be released later on Monday.
The Bank of England (BoE) decided to keep rates at 4.25% at its June policy meeting last week, as widely expected. BoE Governor Andrew Bailey said that interest rates remain on a gradual downward path but warned, "The world is highly unpredictable.” The downbeat UK Retail Sales might encourage traders to raise their bets for further rate cuts by the BoE, which might drag the GBP lower.
Economists polled by Reuters widely expect BOE policymakers to cut rates by 25 basis points (bps) at the next gathering in August and to reduce another 25 bps in the fourth quarter.
On the Euro front, the European Central Bank (ECB) signaled a pause in policy easing this month despite projections showing price growth dropping below its 2% target. This, in turn, could provide some support to the shared currency.
ECB Francois Villeroy de Galhau said on Thursday that the central bank would monitor the situation for signs of a spillover from energy prices into underlying inflation and broader price expectations, which could prompt it to adapt monetary policy accordingly.
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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