EUR/GBP holds gains above 0.8700 ahead of Eurozone HICP inflation data

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EUR/GBP gains ground near 0.8725 in Tuesday’s early European session.
A significant by-election defeat for the Labour government weighs on the Pound Sterling.
ECB’s Kocher said the central bank should be ready to move rates quickly in either direction.

The EUR/GBP cross holds positive ground around 0.8725 during the early European session on Tuesday. The Pound Sterling (GBP) softens against the Euro (EUR) amid political uncertainty in the UK and growing expectations of the Bank of England (BoE) rate cut. The preliminary reading of the Harmonized Index of Consumer Prices (HICP) from the Eurozone will be in the spotlight later on Tuesday.

Domestic political uncertainty exerts some selling pressure on the Pound Sterling. A landmark by-election loss for the Labour Party in Gorton and Denton raises questions about Prime Minister Keir Starmer's leadership.

Furthermore, traders will closely monitor potential rate cuts. While BoE Governor Andrew Bailey recently stopped short of committing to an imminent March rate reduction, the GBP remains sensitive to any signals of monetary easing. The next BoE policy meeting is scheduled for March 19.

Analysts expect the European Central Bank (ECB) to leave rates unchanged through at least mid-2026. However, a spike in oil prices has led some policymakers to suggest the central bank should be prepared to move rates in either direction if economic uncertainty persists.

ECB policymaker Martin Kocher said on Monday that the central bank should be prepared to move rates "quickly in either direction" if fresh economic threats emerge, highlighting a shift away from a pre-determined path.

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.