The EUR/GBP pair is losing momentum to approach the 0.8820 level during the early European session on Thursday. However, the potential downside for the pair may be limited, as weak economic data in the UK has increased expectations of a rate cut from the Bank of England (BoE) in December. The German Producer Price Index (PPI) and Eurozone Consumer Confidence reports will be released later on Thursday.
Recent weak economic data in the UK, such as Consumer Price Index (CPI) inflation, and disappointing GDP and industrial production readings, have strengthened the Bank of England’s bets on a rate cut at its December meeting. The UK’s headline inflation rate fell to 3.6% year-on-year in October, as expected, from 3.8% in September, the Office for National Statistics (ONS) revealed on Wednesday.
In addition, uncertainty and pessimism surrounding the UK budget in the fall may dampen sentiment towards GBP/EUR. The upcoming government budget on November 26 is also expected to influence the Bank of England’s next move.
While the Bank of England faces pressure to cut interest rates, the European Central Bank maintains a more dovish stance, providing some support to the euro. According to a majority of economists polled by Reuters, the ECB will hold interest rates at least until the end of 2026. The need for a longer pause has grown since the ECB last cut key interest rates in June, with inflation hovering around the 2% target, gross domestic product stabilizing, and the unemployment rate remaining at all-time lows.
Questions and answers 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.
