The EUR/GBP cross holds steady near 0.8790 during the early European session on Tuesday. Markets might turn cautious ahead of the UK government’s Autumn Budget, which is scheduled for Wednesday. The final reading of German Gross Domestic Product (GDP) for the third quarter (Q3) will be released later on Tuesday.
UK Chancellor of the Exchequer Rachel Reeves is expected to raise income taxes on households to fill the £22 billion shortfall in the government’s finances. Traders will monitor measures to cut spending, boost economic growth, and reduce inflation, helping the Bank of England (BoE) continue on a rate-cutting path that could resume in December and into next year.
Markets are now pricing in a 60% probability of a rate reduction at the December meeting, and a majority of economists surveyed by Reuters also anticipate a cut. The prospect of a further BoE rate cut might exert some selling pressure on the Pound Sterling (GBP) and act as a tailwind for the cross.
Meanwhile, the European Central Bank (ECB) seems to be nearing the end of its rate-cutting cycle, with most analysts expecting no rate change at the December meeting and only a slim chance of a further quarter-percentage-point reduction in 2026. This is consistent with the ECB’s message that inflation is contained. Eurozone inflation hovered around 2.1% in October, and underlying measures remain consistent with the ECB’s medium-term 2% target. The cautious tone of the ECB could provide some support to the Euro (EUR) against the GBP in the near term.
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.