The euro fell against the British pound after the release of strong UK CPI numbers earlier on Wednesday, finding buyers before the psychological level of 0.8700, and bouncing higher to explore new three-week highs, above 0.8730 at the time of writing.
Economic data released by the UK Office for National Statistics revealed that CPI growth accelerated to a pace of 3.4% in December, from 3.2% in November, above market expectations for a reading of 3.3%.
The British pound rose immediately after the release, only to lose ground shortly thereafter, as investors took stock of the overall picture, which shows core CPI growing at a steady 3.2% year-on-year pace, and producer prices pointing to deeper deflationary trends.
On the other hand, the Euro remains supported by the “Sell America” trade as markets question US leadership and the US dollar’s status as a reserve currency amid Trump’s erratic policies, and in particular, the recent spat with the European Union threatens the Western alliance formed after the World War!!.
Earlier on Wednesday, European Central Bank Governor José Luis Escrivá stressed that there were no reasons to cut interest rates further and that monetary policy was likely to remain steady in the coming months, although the impact on the euro was minimal.
Major currencies are still trading within narrower ranges than in previous days, as investors await US President Trump’s speech in Davos, with particular attention to tense relations with the European Union amid his plans to seize control of Greenland.
(This story was corrected on 21 January at 12:45 GMT to amend the fifth paragraph with comments by ECB Governor Escriva.)
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.
