EUR/GBP extends upside above 0.8500 as weaker UK data boosts BoE rate cut bets
- EUR/GBP extends the rally to around 0.8525 in Friday’s early European session.
- Weak UK employment data boosts BoE rate cut bets, weighing on the Pound Sterling.
- ECB's hawkish tone provides some support to the Euro.
The EUR/GBP cross trades in positive territory for the fifth consecutive day near 0.8525 during the early European session on Friday. A slew of weaker-than-expected UK economic data continues to undermine the Pound Sterling (GBP) against the Euro (EUR). Traders await the Eurozone April Industrial Production and Trade Balance, which are due later on Friday. The European Central Bank (ECB) policymakers are set to speak, including Frank Elderson and José Luis Escrivá.
The Pound Sterling faces some selling pressure as traders raise their bets on interest rate reductions from the Bank of England (BoE) after data earlier this week showed a deterioration in the labor market. 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.
Additionally, the downbeat UK monthly Gross Domestic Product (GDP) report and Industrial Production contribute to the GBP’s downside and create a tailwind for the cross. The UK economy contracted 0.3% MoM in April, compared to an expansion of 0.2% in March, the Office for National Statistics (ONS) showed on Thursday. This figure came in weaker than the expectation of a 0.1% decline in the reported period.
On the other hand, the hawkish tone from the ECB policymakers underpins the shared currency. Croatia’s central bank chief, Boris Vucic, said that the ECB is in a 'very good position' and should wait for another projection on rates. ECB President Christine Lagarde said after the policy meeting that the central bank might be approaching the end of the easing cycle.
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.