EUR/GBP extends downside below 0.8500, all eyes on UK general election
|- EUR/GBP trades in negative territory for the third consecutive day around 0.8465 on Thursday.
- The outcome of the UK general election might potentially trigger some volatility in the Pound Sterling (GBP).
- The easing inflation in the Eurozone bolstered hopes for potential rate cuts by the ECB.
The EUR/GBP cross extends the decline to near 0.8465 during the early European session on Thursday. The Euro edges lower as the softer Eurozone Harmonised Index of Consumer Prices (HICP) inflation report prompted the expectation of interest rate cuts from the European Central Bank (ECB). Market players will closely monitor the UK general elections on Thursday.
The upcoming UK general elections might limit GBP movement ahead of the vote on Thursday before the results potentially trigger some volatility on the Pound Sterling (GBP) on Friday. Political analysts and surveys predict that Labour will win more seats than the record 418 it won when ex-leader Tony Blair ended 18 years of Conservative control in 1997.
On the Euro front, the far right's hopes of winning outright in the French election fell on Tuesday, as centrist and left-wing candidates reluctantly banded together to stop Marine Le Pen's National Rally from seizing power for the first time, per Politico.
Additionally, the annual inflation rate in the Eurozone eased in June. The Eurozone Harmonised Index of Consumer Prices (HICP) increased by 2.5% YoY in June, compared to a rise of 2.6% recorded in the previous month, according to preliminary estimates from Eurostat released on Tuesday. This figure spurred the hopes for potential interest rate cuts by the ECB, which dragged the shared currency lower and created a headwind for EUR/GBP.
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, aka ‘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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