EUR/GBP posts modest losses below 0.8750 despite ECB's cautious outlook

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EUR/GBP trades with mild losses around 0.8740 in Wednesday’s early European session.
BoE’s Lombardelli favors slower rate cuts, saying that she is more worried about upside risks to inflation.
The ECB has adopted a cautious approach to monetary policy, suggesting a pause in the rate-cutting cycle.

The EUR/GBP cross posts modest losses near 0.8740 during the early European session on Wednesday. Hawkish remarks from the Bank of England (BoE) policymakers provide some support to the Pound Sterling (GBP) against the Euro (EUR). Traders will keep an eye on the BoE's Governor Bailey speech later on Wednesday. On Friday, the UK's monthly Gross Domestic Product (GDP) report will be released.

BoE Deputy Governor Clare Lombardelli said on Tuesday that she was worried about upside risks for UK inflation and the central bank should move more slowly to lower borrowing costs as it approaches the end of its interest rate-cutting cycle. Lombardelli’s comments lift the GBP and create a headwind for the cross in the near term.

Nonetheless, growing expectations that the UK central bank will cut interest rates by 25 basis points (bps) to 3.75% at its December monetary policy meeting next week could undermine the GBP. Financial markets are currently pricing in nearly an 88% chance of a quarter-point reduction at the upcoming BoE meeting after signs from economic data that inflation pressure has eased, according to the Reuters poll.

Meanwhile, rising bets that the European Central Bank (ECB) is done cutting interest rates could support the Euro. ECB President Christine Lagarde noted in recent statements that the central bank is not pre-committing to a particular rate path and will maintain a data-dependent, meeting-by-meeting approach to future decisions. She added that the Eurozone economy is in a "good place," with inflation close to the 2% target.

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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