The euro pared some of its losses against the British pound on Wednesday, reaching prices above 0.8790 after bouncing from three-week lows near 0.8760. Investors are adopting a cautious approach towards the pound, awaiting details of the autumn budget, which is expected to be released later the same day.
It is estimated that the UK public finances will show a spending gap of between €20 billion and €30 billion, which will force Finance Minister Rachel Rivers to either announce significant spending cuts or sharp tax rises to bring the deficit under control.
Investors are holding their breath with Reeves in the spotlight. As the UK’s economic outlook deteriorates and debt costs rise, Reeves will be forced to take quick steps to avoid a Liz Truss moment and trigger another debt crisis.
In the Eurozone, recent macroeconomic data has been far from supportive, but some progress towards a peace deal in Ukraine has improved risk appetite and is providing some support to the Euro. US President Donald Trump emphasized that the peace proposal had been improved and that the Ukrainian authorities responded positively to the changes.
In the eurozone calendar, the European Central Bank will release its financial stability report later on Wednesday, ahead of speeches by ECB Governing Council member Philip Lane and President Christine Lagarde. Investors will be attentive to new insights into the central bank’s monetary policy plans.
Frequently asked questions about the pound sterling
The British Pound (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most popular foreign exchange (FX) trading unit in the world, accounting for 12% of all transactions, averaging $630 billion per day, according to data for 2022. The main trading pairs are GBP/USD, also known as “Cable”, which accounts for 11% of FX, GBP/JPY, or “Dragon” as traders know it (3%), and EUR/GBP (2%). The pound sterling is issued by the Bank of England (BoE).
The single most important factor affecting the value of the pound sterling is the monetary policy decided by the Bank of England. The Bank of England bases its decisions on whether it has achieved its primary objective of “price stability” – a stable inflation rate of around 2%. The primary tool for achieving this is adjusting interest rates. When inflation is too high, the Bank of England will try to rein it in by raising interest rates, making it more expensive for individuals and businesses to obtain credit. This is generally positive for the pound, as higher interest rates make the UK a more attractive place for global investors to put their money. When inflation falls to a very low level, it is a sign that economic growth is slowing. In this scenario, the Bank of England would consider lowering interest rates to reduce the cost of credit so that companies borrow more to invest in growth-generating projects.
Data releases measure the health of the economy and can affect the value of the British pound. Indicators such as GDP, manufacturing PMIs, services and employment can all influence the direction of the pound. A strong economy is good for the pound. Not only does it attract more foreign investment, but it may encourage the Bank of England to raise interest rates, which will directly strengthen sterling. Otherwise, if economic data is weak, the British pound is likely to fall.
Another important data release for the British Pound is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a certain period. If a country produces highly sought-after exports, its currency will take full advantage of the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
