EUR/GBP resumes uptrend and hits fresh three-week highs above 0.8730

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The Euro pulled back against the British Pound following strong UK CPI figures earlier on Wednesday, to find buyers ahead of the 0.8700 psychological level, and bounce up to explore fresh three-week highs, above 0.8730 at the time of writing

EUR/GBP rallies to fresh highs above 0.8730 after bouncing above 0.8700.
UK CPI accelerated beyond expectations in December, although the core inflation remained steady.
On Wednesday, all eyes are on US President Trump's speech at the Davos Summit.

Economic data released by the UK National Statistics Office revealed that the Consumer Price Index (CPI) growth accelerated to a 3.4% pace in December, from 3.2% in November, above the market expectations of a 3.3% reading.

The British Pound rallied immediately after the release, to lose ground shortly afterwards, as investors assessed the whole picture, which shows the core CPI growing at a steady 3.2% year-on-ear pace, producer prices pointing to deeper deflationary trends.

The Euro, on the other hand, remains buoyed by the “Sell America” trade as markets put into question the US leadership and the status of the US Dollar as reserve currency amid Trump’s erratic policies, and in particular, the latest rift with the EU threatens the Western alliance forged after World War !!.

Earlier on Wednesday, ECB Governor, Jose Luis Escrivá, affirmed that there are no reasons to cut interest rates further and that monetary policy is likely to remain steady in the coming months, although the impact on the Euro was negligible.

Major currencies remain trading within tighter ranges than in previous days, as investors await US President Trump’s speech in Davos, with particular interest in the strained relationships with the EU amid his plans to take control of Greenland.

(This story was corrected on January 21 at 12:45 GMT to amend the fifth paragraph with remarks from ECB Governor Escriva.)

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.