EUR/GBP softens below 0.8750 after UK CPI inflation data

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EUR/GBP weakens to around 0.8720 in Wednesday’s early European session.
UK CPI inflation rose to 3.4% YoY in December from 3.2% in November.
ECB’s Lagarde said the latest Trump tariff threats could challenge inflation and the economic outlook over the coming years.

The EUR/GBP cross loses ground to near 0.8720 during the early European session on Wednesday. The Pound Sterling (GBP) edges higher against the Euro (EUR) after the UK Consumer Price Index (CPI) inflation report. Traders will take more cues from the UK Retail Sales report for December, which will be released later on Friday.

Data released by the United Kingdom’s Office for National Statistics on Wednesday showed that the country’s headline CPI rose 3.4% YoY in December, compared to an increase of 3.2% in November. This reading came in above the market consensus of 3.3%. The Core CPI, which excludes the volatile prices of food and energy, climbed 3.2% YoY in December versus 3.2% prior, matching the expectation of 3.2%.

Additionally, the monthly UK CPI inflation climbed to 0.4% in December from a decline of 0.2% in November. Markets projected a rise of 0.4%. The Pound Sterling attracts some buyers in an immediate reaction to the hotter UK CPI inflation data.

European Central Bank (ECB) President Christine Lagarde said on Tuesday that uncertainty has returned due to the latest tariff threats by US President Donald Trump. Lagarde added that Trump’s potential action against European countries could challenge the ECB’s outlook for inflation and economic activity over the coming years. Meanwhile, ECB policymaker Francois Villeroy de Galhau stated that any new tariffs must be assessed, adding that he expects their influence on prices to be “muted.”

The UK December Retail Sales data will take center stage on Friday. In case of a stronger-than-expected outcome, this could boost the Pound Sterling and act as a headwind for the cross in the near term.

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.