EUR/GBP gains ground above 0.8650 ahead of German IFO survey release

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The EUR/GBP cross gains traction to near 0.8680, snapping the three-day losing streak during the early European session on Monday. Nonetheless, the upside for the cross might be limited as the Euro (EUR) faces a more mixed economic backdrop.

EUR/GBP trades on a stronger note around 0.8680 in Monday’s early European session.
The Eurozone flash Services PMI came in weaker than expected; German Manufacturing and Services PMI beat forecasts.
The upbeat UK economic data could limit the chance of a BoE rate cut.

The Eurozone flash Purchasing Managers Index (PMI) pointed to a soft services sector in January, with the index falling to 51.9, below December’s reading and market expectations. Meanwhile, German Services PMI beat forecasts and remained in expansionary territory, while the Manufacturing PMI improved but stayed below the expansion–contraction threshold.

The European Central Bank (ECB) policymakers did not discuss raising or cutting rates at the December meeting, emphasizing a data-dependent and meeting-by-meeting approach. Expectations for further rate cuts this year have largely vanished due to a mixed economic picture and sticky services inflation.

The stronger-than-expected UK Retail Sales and PMI data released on Friday could provide some support to the Pound Sterling (GBP) as they have led some analysts to predict a potential delay in further Bank of England (BoE) rate cuts. The UK central bank is expected to leave rates unchanged when it next meets in February. Markets fully price in a quarter-point rate cut by June, according to Reuters.

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.