EUR/GBP trims gains below 0.8800 after UK labor market report

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The EUR/GBP cross pares gains near 0.8785 during the early European session on Tuesday. The Pound Sterling (GBP) recovers some lost ground against the Euro (EUR) after the UK employment data.

EUR/GBP holds positive ground around 0.8785 in Tuesday’s early European session.
UK Unemployment Rate climbed to 5.1% in three months to October; Claimant Count Change came in at 20.1K in November.
The ECB is expected to hold interest rates steady on Thursday for the fourth consecutive meeting.

The EUR/GBP cross pares gains near 0.8785 during the early European session on Tuesday. The Pound Sterling (GBP) recovers some lost ground against the Euro (EUR) after the UK employment data. Traders will keep an eye on the preliminary reading of HCOB Purchasing Managers Index (PMI) reports from the Eurozone, France and Germany, which are due later on Tuesday. The attention will shift to the European Central Bank (ECB) and Bank of England (BoE) interest rate decisions on Thursday.

Data released by the UK Office for National Statistics on Tuesday showed that the country’s ILO Unemployment Rate rose to 5.1% in the three months to October, versus 5.0% prior. This figure came in line with the expectations during the reported period.

Meanwhile, the Claimant Count Change increased by 20.1K in November versus a decline of 3.9K prior (revised from 29K). The Pound Sterling attracts some buyers in an immediate reaction to the upbeat UK employment report. However, the rising bets of a BoE rate cut might cap the upside for the GBP.

The BoE’s Monetary Policy Committee (MPC) is widely anticipated to cut the base interest rate from the current 4.0% to 3.75% at its next meeting on Thursday. This would mark the first rate reduction since August and bring borrowing costs to their lowest level in nearly three years.

On the Euro’s front, markets widely expect the ECB to hold interest rates steady at their current levels at its December meeting on Thursday, continuing a pause in its easing cycle. Rising bets that the European Central Bank (ECB) is done cutting interest rates could support the EUR against the GBP in the near term.

ECB Governing Council member Isabel Schnabel said that she was "rather comfortable" to see traders pencil in hikes, fueling expectations of possible ECB rate rises next year. Meanwhile, ECB policymaker Joachim Nagel stated that the current rates are in a "good place," reinforcing the consensus for a hold.

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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