EUR/GBP is attracting some sellers to around 0.8745 during the early European session on Monday. The pound rose against the euro after the Bank of England (BoE) cut interest rates for the fourth time this year, although markets fell short of their expectations for further easing.
The Bank of England cut interest rates to 3.75% at its December meeting last week, the lowest level since February 2023. It was the fourth rate cut this year and was widely expected amid low inflation and a slowing economy. However, UK GDP growth forecast for 2025 to 1.5% from 1.0% provides some support to the pound and creates headwinds for the pair.
On the other hand, the European Central Bank kept its key interest rate unchanged last week. European Central Bank President Christine Lagarde said that monetary policy is in a “good position” and that interest rates will remain steady for a long time. New forecasts followed the interest rate decision, predicting stronger economic growth and inflation rising to 2% in 2028 after remaining below that level for most of the next two years.
UK GDP data for the third quarter will be the highlight later on Monday. The British economy is expected to grow by 0.1% and 1.3% on a quarterly and annual basis, respectively. If reports show weaker than expected results, this could lead to a decline in the pound against the euro.
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.
