EUR/GBP attracts some sellers below 0.8750 as BoE keeps cautious stance on future cuts
- EUR/GBP softens to around 0.8720 in Monday’s early European session.
- BoE’s Greene warned of upside inflation risks.
- Persistent conflict between Russia and Ukraine could weigh on the EUR against the GBP.
The EUR/GBP cross loses momentum to near 0.8720 during the early European session on Monday. The expectation that the Bank of England (BoE) is unlikely to cut the interest rates in the near term provides some support to the Pound Sterling (GBP) against the Euro (EUR). Germany’s Retail Sales for August and UK Gross Domestic Product (GDP) data for the second quarter (Q2) will be highlights later on Tuesday.
Traders expect the UK central bank to hold interest rates steady at 4.0% in the remainder of the year. The BoE has taken a "gradual and careful" approach to rate reductions as inflationary pressures in the UK economy are proving to be persistent. BoE Monetary Policy Committee (MPC) member Megan Greene last week warned of upside inflation risks and advised caution on loosening the monetary policy further.
The UK GDP is estimated to grow by 0.3% QoQ in Q2, compared to 0.3% in the previous reading. On an annual basis, the UK GDP is projected to expand 1.2% during the same period. Any signs of weakness in the UK economy could weigh on the GBP and create a tailwind for the cross.
CNN reported that Russia fired more than 600 drones and missiles at targets across Ukraine in the early hours of Sunday morning - one of the largest barrages of the war. Ukrainian President Volodymyr Zelensky said the deaths all occurred in the capital, Kyiv, where many of the projectiles were aimed, and the victims included a 12-year-old girl. The escalating tension between Russia and Ukraine implies higher energy costs and increases geopolitical uncertainty in the Eurozone, which generally undermines the EUR.
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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