- EUR/GBP tumbles to around 0.8525 in Thursday’s early European session.
- The strong UK PMI data underpin the Pound Sterling and create a headwind for the cross.
- BoE’s Bailey sees more signs of a softening labor market.
The EUR/GBP cross loses traction to near 0.8525 during the early European session on Thursday, pressured by a stronger Pound Sterling (GBP) broadly. Traders will closely monitor the Bank of England’s (BoE) Governor Andrew Bailey speech later on Thursday.
UK business activity expanded modestly in June, which provides some support to the GBP. The S&P Global UK Composite PMI rose to 50.7 in June versus 50.3 prior, stronger than the 50.5 expected. Additionally, the services sector, which dominates the UK economy, registered its fastest growth in three months and outperformed its German and French counterparts in June.
BoE Governor Andrew Bailey said on Tuesday there were now signs that the UK labor market was softening, and he emphasized his view that interest rates are likely to continue falling. The UK central bank left interest rates unchanged at 4.25% at the June meeting, although three of the nine members of the Monetary Policy Committee (MPC) voted to cut interest rates.
The BoE’s Bailey speech will be the highlight later in the day. Any dovish comments from the policymakers could drag the Pound Sterling lower and cap the downside for the cross.
On the Euro front, the European Central Bank (ECB) officials are expected to face downside economic risks considering the uncertainty surrounding the tariff policy imposed by the US. Traders will take more cues from the speeches by the ECB policymakers. ECB’s Luis de Guindos and Isabel Schnabel are scheduled to speak later on Thursday.
Pound Sterling FAQs
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).
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.
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.
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.
