EUR/GBP extends the rally above 0.8500 ahead of ZEW Economic Sentiment Surveys
- EUR/GBP remains firm around 0.8520 in Tuesday’s early European session.
- Traders expect the ECB to pause its easing cycle this year.
- BoE rate cut bets continue to weigh on the Pound Sterling.
The EUR/GBP cross extends its upside to near 0.8520 during the early European trading hours on Tuesday. The Euro (EUR) strengthens against the Pound Sterling (GBP) as traders expect the European Central Bank (ECB) to pause its easing cycle to assess the impact of new US tariffs. Later on Tuesday, the ZEW Survey from Germany and the Eurozone will be published.
The hawkish tone from the ECB policymakers and rising expectation that the ECB will pause its easing cycle underpin the shared currency. ECB President Christine Lagarde said that rate reductions are coming to an end as the central bank is now “in a good position” to deal with prevailing uncertainties.
Meanwhile, ECB Executive Board member Isabel Schnabel stated last week that the central bank’s interest rate cutting campaign may soon be over, with inflation and the economy both on track. ECB Governing Council member Gediminas Simkus called for a pause in rate cuts due to “very big uncertainty” over US tariff policy.
The Pound Sterling remains under selling pressure as traders raise their bets on interest rate reductions from the Bank of England (BoE) after a slew of weaker-than-expected UK economic data. The UK central bank is expected to cut the policy by 25 basis points (bps) in the third quarter and the fourth quarter, bringing down the bank rate to 3.75%, according to a large majority of economists polled by 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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