The EUR/GBP pair is trading flat near 0.8655 during early European trading hours on Tuesday. However, the pair’s potential upside may be limited as the Bank of England (BoE) has indicated that monetary policy will remain on a gradual downward path, lifting the British Pound (GBP). The preliminary reading of the German consumer price inflation index will be published later on Tuesday.
The British central bank said at its last policy meeting for 2025 that monetary policy will remain on a “gradual downward path” after cutting interest rates by 25 basis points to 3.75% at its policy meeting in December. This, in turn, could provide some support to the British pound and act as a headwind for the pair. Financial markets expect the Bank of England to cut interest rates at least once in the first half of the year, and expect a nearly 50% chance of a second cut before the end of the year, according to Reuters.
Rising geopolitical tensions between Ukraine and Russia may impact sentiment around the euro against sterling, as the eurozone relies heavily on Russian oil and natural gas imports. The Russian Defense Ministry claimed that Ukraine has targeted Moscow with drones every day from 2026 until now. Ukraine says such attacks are intended to disrupt military logistics and energy infrastructure, increase the costs of Moscow’s war effort, and retaliate for repeated Russian missile and drone attacks in the war Russia launched nearly four years ago.
Traders will benefit from a quick reading of the CPI inflation report from Germany later today. The German CPI is expected to show an increase of 0.2% m/m in December, while the consolidated CPI is expected to show a rise of 0.4% m/m over the same period. Any signs of rising inflation in Germany may support the euro in the near term.
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.
