EUR/GBP remains firm above 0.8700 on downbeat UK Retail Sales data

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The EUR/GBP cross remains firm around 0.8705 during the early European session on Friday. The Pound Sterling (GBP) weakens against the Euro (EUR) after the weaker-than-expected UK economic data. The IFO business sentiment index report from Germany will be released later on Friday.

EUR/GBP holds positive ground near 0.8705 in Friday’s early European session.
The UK Retail Sales rose 0.9% MoM in June, weaker than expected.
ECB held its key interest rate at 2.0% at its July meeting on Thursday.

Data released by the Office for National Statistics (ONS) showed on Friday that the UK Retail Sales increased 0.9% MoM in June, versus a fall of 2.8% prior (revised from -2.7%). This figure came in weaker than the market consensus of a rise of 1.2%. On an annual basis, Retail Sales climbed 1.7% in June compared to a fall of 1.1% prior (revised from -1.3%), worse than the estimation of a rise of 1.8%. The GBP attracts some sellers in an immediate reaction to the downbeat UK Retail Sales data.

As widely expected, the European Central Bank (ECB) on Thursday decided to keep interest rates steady amid an uncertain environment due to trade disputes. The ECB has cut interest rates at each of its four meetings so far this year, bringing its key deposit facility from 3.0% in January to 2.0% in June.

ECB President Christine Lagarde said the risks to the economy remained “tilted to the downside” and global trade tensions could “dampen exports and drag down investment and consumption. Lagarde further stated that the ECB was “well-positioned to wait and see” as inflation was at 2.0% and that the central bank’s projections pointed to the rate stabilising at that level in the medium term. Money markets are now pricing in less than a 30% odds of a 25 basis point (bps) rate cut when the ECB meets next on September 11, which might support the shared currency.

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.

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