EUR/GBP declines to near 0.8700 on Ukraine-Russia tensions
- EUR/GBP drifts lower to around 0.8700 in Monday’s early European session.
- Heightened geopolitical uncertainty in Ukraine weighs on the Euro.
- The BoE guided that the monetary policy will remain on a gradual downward path.
The EUR/GBP cross loses traction to near 0.8700 during the early European session on Monday. The cross edges lower amid rising geopolitical tensions in Ukraine and a cautious tone surrounding the Bank of England’s (BoE) policy outlook. Traders brace for the preliminary reading of the Consumer Price Index from Germany, which will be released on Tuesday.
Russia’s defence ministry claimed that Ukraine has targeted Moscow with drones every day of 2026 so far. Ukraine says such attacks aim to disrupt military logistics and energy infrastructure, raise costs for Moscow’s war effort, and respond to repeated Russian missile and drone attacks in the war that Russia launched nearly four years ago.
The Euro area was heavily dependent on Russian oil and natural gas imports, and heightened geopolitical uncertainty between Russia and Ukraine could exert some selling pressure on the EUR against the GBP.
The Bank of England (BoE) is expected to follow a gradual monetary easing path in 2026, which could underpin the GBP and create a headwind for the cross. The UK central bank cut interest rates from 4.0% to 3.75% at its December policy meeting, the lowest level in nearly three years. Money markets expect the BoE to deliver at least one rate reduction in the first half of the year and are pricing in nearly a 50% chance of a second cut before the year-end, according to Reuters.
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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