The Euro is trimming some losses against the British Pound on Wednesday, and reaches prices above 0.8790 after bouncing from three-week lows near 0.8760. Investors are adopting a cautious approach to the Pound, awaiting the details of the Autumn Budget, which are expected to be released later on the same day.
UK public finances are estimated to show a spending gap between EUR20 billion and EUR30 billion, which will force Finance Minister Rachel Reevers 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. With the UK’s economic prospects deteriorating and debt costs on the rise, Reeves will be forced to step on some toes to avoid a Liz Truss moment and trigger another debt crisis.
In the Euro Area, recent macroeconomic data have 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 affirmed that the peace proposal has been fine-tuned and the Ukrainian authorities have responded positively to the changes.
In the Eurozone calendar, the European Central Bank (ECB) will release its Financial Stability Report later on Wednesday, ahead of the speeches of ECB board member Philip Lane and President Christine Lagarde. Investors will be attentive to new insights into the central bank’s monetary policy plans.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data.
Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates.
When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money.
When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP.
A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period.
If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.