EUR/GBP extends downside below 0.8350, investors await the BoE rate decision
|- EUR/GBP tumbles to near 0.8345 in Wednesday’s early European session.
- The BoE is expected to cut interest rates at its November meeting on Thursday.
- Diminishing odds for larger ECB rate cuts might help limit the EUR’s losses.
The EUR/GBP cross extends its decline to around 0.8345 during the early European session on Wednesday. The rising expectation that the Bank of England (BoE) will cut rates slowly supports the Pound Sterling (GBP) and weighs on the cross. The BoE interest rate decision will be in the spotlight on Thursday.
The UK central bank is anticipated to reduce its interest rate from 5.0% to 4.75% at its Monetary Policy Committee meeting on Thursday. The markets believe the heightened UK government spending may be inflationary, triggering the BoE to slow the expected path of rate cuts.
“Markets have already tempered expectations [and are] now forecasting two or three rate cuts in 2025, down from earlier projections of four or five,” said Daniela Sabin Hathorn, senior market analyst at Capital.com. “The BoE is now expected to cut rates less aggressively than the Fed and the ECB,” Hathorn added in a note.
The European Central Bank (ECB) has already reduced rates three times already this year as inflation risks in the Eurozone ease faster than expected. The central bank lowered the deposit rate by a further 25 basis points (bps) at its October meeting. The decision came after inflation in the euro area cooled to 1.8% in September, below the ECB’s 2% target.
Nonetheless, the stronger-than-expected Eurozone Gross Domestic Product (GDP) could trim the ECB rate cut expectation, which caps the downside for the shared currency. The ECB's President Christine Lagarde and Vice President Luis de Guindos are scheduled to speak later on Wednesday. Investors will take more cues from the speeches. Less dovish remarks could lift the EUR against the GBP for the time being.
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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