- EUR/GBP holds positive ground to near 0.8305 in Monday’s early European session.
- Traders interpreted the BoE's decision as a dovish hold, undermining the GBP.
- ECB’s Lagarde said the Eurozone was getting "very close" to reaching the medium-term inflation target.
The EUR/GBP cross extends the rally to around 0.8305 during the early European session on Monday. The dovish bets for the Bank of England (BoE) weigh on the Pound Sterling (GBP) and create a tailwind for EUR/GBP. Traders price in a 53 basis points (bps) interest rate reduction by the UK central bank in 2025 after the policy announcement.
The Bank of England's (BoE) split vote decision to leave interest rates unchanged at 4.75% last week and a dovish hold dragged the GBP lower against the shared currency. BoE policymakers highlighted external risks, including uncertainty over geopolitical tensions and potential Donald Trump tariff threats. "With the heightened uncertainty in the economy, we can't commit to when or by how much we will cut rates in the coming year,” said BoE Governor Andrew Bailey.
On the Euro front, the European Central Bank (ECB) President Christine Lagarde said the Eurozone was getting "very close" to reaching the ECB's medium-term inflation target, per the Financial Times on Monday. Lagarde further stated that the central bank would cut interest rates further if inflation continued to ease towards its 2% goal, as curbing growth was no longer necessary.
ECB policymakers have become worried about growing economic risks due to weak demand and US President-elect Donald Trump's potential tariff threats. The ECB will hold its first rate-setting meeting of 2025 on January 30. Investors envisage a slightly more aggressive path of the ECB easing cycle next year, which might weigh on the Euro against the 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, 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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