EUR/GBP holds losses near 0.8650 after weaker German Industrial Production data

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The EUR/GBP cross holds losses around 0.8650 during the early European session on Friday. The Euro (EUR) softens against the Pound Sterling (GBP) on the downbeat German economic data.

EUR/GBP loses ground to near 0.8650 in Friday’s early European session.
German Industrial Production falls 0.7% MoM in March, weaker than expected.
BoE’s Bailey warned of "forceful tightening" if energy price shocks from the Middle East conflict continue to drive inflation.

The EUR/GBP cross holds losses around 0.8650 during the early European session on Friday. The Euro (EUR) softens against the Pound Sterling (GBP) on the downbeat German economic data. Traders brace for the speeches from the European Central Bank policymakers later on Friday, including Christine Lagarde, Luis de Guindos, Piero Cipollone, Isabel Schnabel , and Joachim Nagel.

Data released by Destatis on Friday revealed that Germany’s industrial sector activity fell sharply in March, with Industrial Production falling by 0.7% MoM, versus a decline of 0.5% prior (revised from -0.3%). This figure came in weaker than the expectation of a 0.5% rise.

Annually, German Industrial Production arrived at -2.8% in March, following February’s revised 0.2% decrease. The Euro edges slightly lower against the GBP in an immediate reaction to the worse-than-expected German report.

Hawkish remarks from the ECB officials might help limit the EUR’s losses. ECB Executive Board member Isabel Schnabel bolstered expectations that the bank could raise interest rates as soon as next month, saying companies and households were now reacting in a concerning way to surging global energy prices.

Meanwhile, ECB board member Piero Cipollone noted on Wednesday that the chance of a central bank rate hike has risen as ‌inflation pressures are high, even as negotiated wage data showed pay demands had yet to increase.

On the UK’s front, the Bank of England (BoE) decided to hold the bank rate steady at 3.75% as widely expected at the last meeting, presenting a scenario framework that suggests rate hikes could be appropriate but avoiding any pre-commitment. BoE Governor Andrew Bailey warned of "forceful tightening" if energy price shocks from the Middle East conflict continue to drive inflation.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.