- EUR/GBP trades in negative territory around 0.8450 in Thursday’s early European session.
- The rising expectation of an ECB further rate cut drags the Euro lower.
- Markets expect one or two more rate reductions from the BOE after February.
The EUR/GBP cross softens to near 0.8450 during the early European trading hours on Thursday. The dovish stance of the European Central Bank (ECB) policymakers weighs on the Euro (EUR) against the Pound Sterling (GBP). The preliminary reading of Eurozone Consumer Confidence for January will be released later on Thursday.
ECB President Christine Lagarde, along with policymaking council members Francois Villeroy de Galhau, Klaas Knot, and Yannis Stournaras, all supported further rate reductions. This, in turn, could undermine the shared currency in the near term. Investors have fully priced a cut in the 3.0% deposit rate on January 30 and expect the benchmark to lower to 2.0% by the end of the year.
ECB Croatian central bank chief Boris Vujcic said earlier this week that market expectations for European Central Bank interest rate cuts are reasonable and risks around the inflation outlook are broadly balanced. Meanwhile, ECB President Christine Lagarde emphasized on Wednesday that the central bank is “not overly concerned” about the risk of inflation from abroad and will continue to reduce interest rates at a gradual pace.
On the GBP’s front, investors anticipate the Bank of England (BoE) to cut its main interest rate by 25 basis points (bps) to 4.5% on February 6, and economists polled by Reuters expect three additional cuts this year, while markets expect one or two more after February. “We still think the Bank of England will cut interest rates at the next meeting in February, from 4.75% to 4.50%, and continue to cut rates gradually thereafter,” noted Capital Economics analysts.
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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