EUR/GBP holds losses below 0.8750 after UK CPI inflation data
- EUR/GBP trims gains around 0.8735 in Wednesday’s early European session.
- UK CPI inflation fell to 3.0% YoY in January, as expected.
- Traders await the UK January Retail Sales data and the flash reading of the Eurozone PMI on Friday for fresh impetus.
The EUR/GBP cross holds losses near 0.8735 during the early European session on Wednesday. The Pound Sterling (GBP) edges slightly higher against the Euro (EUR) after the UK Consumer Price Index (CPI) inflation report. On Friday, the UK January Retail Sales data and the flash reading of the Eurozone Purchasing Managers Index (PMI) will be in the spotlight.
Data released by the United Kingdom’s Office for National Statistics on Wednesday showed that the country’s headline CPI rose 3.0% YoY in January, compared to an increase of 3.4% in December. This reading came in line with the market consensus of 3.0%. The Core CPI, which excludes the volatile prices of food and energy, climbed 3.1% YoY in January versus 3.2% prior, matching the expectation.
Additionally, the monthly UK CPI inflation came in at -0.5% in January from a rise of 0.4% in December. Markets projected a decline of 0.5%. The Pound Sterling attracts some buyers in an immediate reaction to the UK CPI inflation data.
On the Euro’s front, traders expect the European Central Bank (ECB) to hold its benchmark interest rate steady at 2.0% all year before possible rate hikes next year. This, in turn, could provide some support to the EUR against the GBP.
Traders will take more cues from the preliminary PMI readings from the Eurozone and Germany on Friday. In case of stronger-than-expected outcomes, this could lift the EUR in the near term.
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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