The EUR/GBP cross loses ground near 0.8655 during the early European session on Wednesday. The Euro (EUR) weakens against the Pound Sterling (GBP) after the German economic data. Later on Wednesday, the preliminary reading of the Harmonized Index of Consumer Prices (HICP) from the Eurozone will be in the spotlight.
Data released by Destatis on Wednesday showed that German Retail Sales fell 0.6% month-over-month in November, compared to a 0.3% decline in October. This figure came in weaker than the market consensus of a 0.2% increase. On an annual basis, Retail Sales climbed 1.1% in November versus a rise of 0.9% prior. The EUR edges slightly lower in an immediate reaction to the German Retail Sales data.
Traders will keep an eye on the flash reading of the Eurozone HICP report later in the day. Any signs of hotter-than-expected inflation in the Eurozone could help limit the EUR’s losses in the near term. Markets widely anticipate that the European Central Bank (ECB) will keep rates stable for the near future, with some economists forecasting potential rate cuts later if economic conditions weaken.
The Bank of England’s (BoE) Monetary Policy Committee (MPC) guided that the monetary policy will remain on a gradual downward path, but future decisions will depend on the evolution of inflation, pay growth, and services inflation. Money markets expect the UK central bank to deliver at least one rate reduction in the first half of the year and are pricing in nearly a 50% chance of a second cut before the year-end, according to Reuters. A cautious tone surrounding the BoE policy outlook could provide some support to the GBP against the EUR.
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.