EUR/GBP softens below 0.8700 on robust UK data

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The EUR/GBP cross trades in negative territory around 0.8695 during the early European trading hours on Thursday. The Pound Sterling (GBP) strengthens against the Euro (EUR) on the upbeat UK economic data.

EUR/GBP weakens to near 0.8695 in Thursday’s early European session.
The UK economy grew by 0.5% MoM in February, stronger than expected.
ECB policymakers lean toward a hold to gather more data on whether Middle East geopolitical tensions will have an impact on inflation.

Data released by the Office for National Statistics (ONS) on Thursday showed that the UK Gross Domestic Product (GDP) rose by 0.5% MoM in February, following a 0% reported in January. This figure came in stronger than the expectations of 0.1%.

Meanwhile, the monthly Industrial Production climbed by 0.5% MoM in February versus a decline of 0.1% prior. The GBP attracts some buyers in an immediate reaction to the stronger UK economic data.

The European Central Bank (ECB) policymakers are leaning toward keeping interest rates unchanged at the April policy meeting. ECB President Christine Lagarde stated this week that the central bank needs to be “completely agile” on rates but stressed that it doesn’t have a bias toward raising them.

Nonetheless, investors see rate hikes as inevitable, expecting two quarter-point increases this year. According to Reuters, financial markets now see a one-in-five chance of an ECB rate hike in the April policy meeting, but a move by June is nearly fully priced in, and a second hike in the autumn is also anticipated.

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.