- EUR/GBP rises to near 0.8450 in Friday’s early European session, adding 0.30% on the day.
- The UK Retail Sales declined 0.3% MoM in December, weaker than expected.
- The ECB emphasised gradual rate cuts amid economic uncertainties.
The EUR/GBP cross extends its upside to around 0.8450 on Friday during the early European trading hours. The Pound Sterling (GBP) weakens after the UK Retail Sales data for December. The attention will shift to the Eurozone Current Account and Harmonized Index of Consumer Prices (HICP), which are due later on Friday.
Data released by the Office for National Statistics on Friday showed that UK Retail Sales unexpectedly declined 0.3% MoM in December after growing 0.1% (revised from 0.2%) in November. Markets estimated an increase of 0.4% in the reported month.
On an annual basis, Retail Sales in the UK climbed 3.6% in December, compared to 0% in November (revised from 0.5%), below the market consensus of 4.2%. The GBP attracts some sellers in an immediate reaction to the downbeat Retail Sales report.
Meanwhile, the Bank of England (BoE) has room to ease further and support economic activity as inflation is cooling. The BoE policymaker Alan Taylor said on Wednesday, “We are in the last half mile on inflation, but with the economy weakening, it’s time to get interest rates back toward normal to sustain a soft landing.”
The market is pricing almost 90% odds of a 25 bp cut in February and a total of 50 bp of cuts over the next 12 months (but now edging towards 75 bp). Traders see a nearly 90% chance that the BoE will cut interest rates by 25 basis points (bps) to 4.5% at the February meeting and a total of 50 bps reductions over the next 12 months.
On the Euro front, the European Central Bank (ECB) Monetary Policy Meeting Accounts released on Thursday showed that policymakers agreed in the December meeting that interest rate cuts should be approached cautiously and gradually, but they also noted that further rate cuts were likely coming given weakening price pressures.
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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