EUR/GBP edges higher above 0.8700 as UK fiscal worries grow

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EUR/GBP strengthens to near 0.8700 in Wednesday’s early European session.
UK borrowing costs hit their highest since 1998, the GBP falls on fiscal worries.
The ECB’s Lagarde speech will be the highlight later on Wednesday.

The EUR/GBP gains ground to around 0.8700 during the early European session on Wednesday. Concerns about the UK's ability to keep its finances under control undermine the Pound Sterling (GBP) against the Euro (EUR). Traders brace for the European Central Bank’s (ECB) President Christine Lagarde speech later on Wednesday.

The GBP and UK markets suffered a fresh sell-off on Tuesday, with the UK government's long-term borrowing costs reaching their highest level since 1998. These developments add pressure on the chancellor ahead of the budget. “The moves reflect a broad concern about the fiscal outlook in the developed world,” said Valentin Marinov, head of G10 FX strategy at Credit Agricole. “The pound is once again seen as the pressure valve for wary investors,” added Marinov.

On the other hand, the hotter-than-expected preliminary reading of Germany’s Consumer Price Index (CPI) report and the Eurozone’s Harmonized Index of Consumer Prices (HICP) led to uncertainty regarding future ECB actions and prompted investors to reassess the likelihood of ECB rate cuts. ECB board member Isabel Schnabel said on Tuesday that the interest rates are already mildly accommodative, adding that she does not see a reason for a further rate cut.

Traders will closely monitor the developments surrounding French politics as French Prime Minister François Bayrou is expected to lose a confidence vote. Opinion polls from Reuters showed that most French people now want new national elections, pointing to deepening dissatisfaction with politics and a risk of lasting uncertainty. Fears of a French political crisis could exert some selling pressure on the shared currency 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.