EUR/GBP softens below 0.8750 on trade uncertainty

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EUR/GBP weakens to around 0.8730 in Tuesday’s early European session.
Renewed trade uncertainty undermines the Euro against the Pound Sterling.
BoE’s Taylor said the central bank might have two or three rate cuts before returning to the neutral level.

The EUR/GBP cross loses ground to near 0.8730 during the early European session on Tuesday. Renewed global trade concerns, including potential US tariff measures, weigh on the Euro (EUR) against the Pound Sterling (GBP). The German Gross Domestic Product (GDP) and the Eurozone inflation report are due later on Wednesday.

The US Supreme Court’s ruling on Friday struck down many of the tariffs that US President Donald Trump put in place. In response, Trump said he would impose a new 15% tariff on Saturday. The European Parliament decided on Monday to postpone a vote on the European Union's trade deal with the United States (US) due to the new import tariffs.

Meanwhile, Trump on Monday warned countries against backing away from recently negotiated trade deals with the US, saying that he would hit them with much higher duties under different trade laws. Fears of a renewed trade war could exert some selling pressure on the EUR against the GBP as the Eurozone is more sensitive to these disruptions than the UK.

On the other hand, dovish remarks from Bank of England’s (BoE) Monetary Policy Committee (MPC) member Alan Taylor might drag the GBP lower and create a tailwind for the cross. BoE’s Taylor expresses concerns over the UK economic growth, optimism about inflationary pressures returning to the central bank’s 2% target, and supports more interest rate cuts in the near term.

Taylor said that risks are shifting to “lower inflation and higher unemployment”; therefore, the UK central bank might have two to three rate reductions to go before the theoretical neutral level.”

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.