EUR/GBP holds firm near 0.8700 amid mounting UK budget concerns

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EUR/GBP drifts higher to around 0.8690 in Monday’s early European session.
Mounting budgetary concerns in the UK might weigh on the GBP.
S&P downgraded France's credit rating from AA to A+.

The EUR/GBP cross gains ground near 0.8690 during the early European session on Monday. The Pound Sterling (GBP) softens against the Euro (EUR) on lingering fiscal concerns in the United Kingdom (UK). The European Central Bank (ECB) Isabel Schnabel and Joachim Nagel are set to speak later on Monday.

Growing concerns over the UK’s fiscal policy undermine the GBP and create a tailwind for the cross. UK Chancellor of the Exchequer Reeves confirmed that the government is not going to increase the wealth tax in the upcoming Autumn Budget scheduled next week. However, she clarified that there would be further tax hikes and cuts in public spending.

The Bank of England (BoE) Governor Andrew Bailey stated that any future rate cuts will be "gradual and careful”. Meanwhile, BoE Chief Economist Huw Pill advocated for a more cautious approach to additional rate reductions, citing persistent inflationary pressures. The cautious remarks from the UK central bank policymakers might help limit the GBP’s losses.

On the other hand, S&P Global Ratings downgraded France to A+ from AA-, per Bloomberg on Saturday. The downgrade means France has lost its AA- rating at two of the three major credit assessors in little more than a month, including downgrades from Fitch and DBRS. The budget uncertainty and political crisis in France might drag the EUR lower against the GBP in the near term.

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.