Euro stands tall against the British Pound despite the risk-off sentiment
- EUR/GBP holds gains around 0.8550, with bulls testing three-week highs.
- The Euro is drawing support from lower Oil prices and expectations of further ECB tightening.
- An uncertain BoE monetary policy and concerns about the UK's public finances are weighing on the Pound.
The Euro (EUR) consolidated gains, just below three-week highs against the British Pound (GBP) on Tuesday, trading sideways at the mid-range of the 0.8550s at the time of writing. The risk-off mood is weighing on Euro rallies, but GBP bulls are also subdued amid concerns about the UK government’s fiscal policy and caution ahead of the Bank of England’s (BoE) monetary policy meeting, due later this week.
A pause in hostilities between the US and Iran and the ensuing decline in Oil prices is underpinning the common currency, which is also drawing some support from the hawkish stance of last week’s European Central Bank (ECB) monetary policy.
The ECB left interest rates on hold, following a 25-basis-point hike in June, but signalled a further rate hike in September, as high energy prices keep pushing inflationary pressures higher.
BoE seen tolerating 3% inflation as risks stay below second-round threshold
In the UK, the focus this week shifts to the BoE, which is widely expected to leave its benchmark Bank Rate unchanged at 3.75%. Investors will look at the number of hawkish dissenters within the committee, and Governor Bailey's comments at the press conference to confirm market expectations that the bank will hike rates in the last quarter of the year.
Economists at ING are sceptical about that posibility, though, as the Bank of England’s updated projections are set to show inflation running “fairly close to 3% in the second half of this year and into early next,” a level they argue remains comfortably within the Bank’s tolerance. In this context, their base case is that "the Bank stays on hold through 2026,” with policy easing pushed well into the next cycle. ING says it “currently project[s] two rate cuts from the spring of 2027,” but emphasises that this path is “contingent on there being no material fiscal stimulus at the Autumn Budget.”
Beyond that, the Pound has been on the back foot with investors wary about the financing for the new Prime Minister Andy Burnham’s spending pledges. Burnham announced caps on transport fares and electricity bills, triggering market concerns about further strains on public finances, a very sensitive issue in the UK after Liz Truss's fiasco in 2022.
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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