EUR/GBP gathers strength above 0.8700 amid UK political risks

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The EUR/GBP cross holds positive ground near 0.8725, snapping the three-day losing streak during the early European session on Wednesday. The Pound Sterling (GBP) softens against the Euro (EUR) due to the upcoming UK political events.

EUR/GBP gains traction to around 0.8725 in Wednesday’s early European session.
Political risks in the UK from an upcoming election to fill a parliamentary seat weigh on the Pound Sterling.
The EU froze the US trade deal after the Supreme Court struck down Trump's tariffs.

Manchester's Gorton and Denton constituency is scheduled to hold a special election to fill a vacated parliamentary seat on Thursday. This event is seen as a major test for UK Prime Minister Keir Starmer amid internal party discontent and low approval ratings.

"A heavy defeat for the ruling Labour Party could re-ignite speculation over the Labour leadership and again weigh on sterling," said ING's FX strategist Francesco Pesole.

On the Euro front, the US Supreme Court’s ruling on Friday struck down many of the tariffs that US President Donald Trump put in place. On Saturday, Trump responded by announcing that he would impose a further 15% tariff. Due to the higher import duties, the European Parliament agreed on Monday to postpone a vote on the EU's trade agreement with the US.

Fears of a renewed trade war could undermine the EUR against the GBP, as the Eurozone is more vulnerable to these disruptions than the UK.

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.