EUR/GBP declines below 0.8750 as UK GDP matches forecasts

EUR/GBP weakens to around 0.8730 in Tuesday’s early European session.
The UK economy expanded 0.1% QoQ in the third quarter, in line with the consensus.
ECB’s Lagarde emphasized the central bank is not pre-committing to a specific rate path, keeping all options on the table.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trades in negative territory for the fourth consecutive day near 0.8730 during the early European session on Tuesday. The Pound Sterling (GBP) weakens against the Euro (EUR) after the Bank of England (BoE) delivered a widely expected rate cut but suggested that the bar for further reduction was high, given persistent inflation.

The UK central bank cut the interest rates to 3.75% at its December meeting last week, the lowest level since February 2023. BoE Governor Andrew Bailey said during the press conference that the overall trend for interest rates was down, but this might not happen as quickly as some analysts expect.

Money markets believe the BoE will deliver at least one rate cut in the first half of the year and are pricing in nearly a 50% probability of a second before the year-end, according to Reuters.

Furthermore, the final reading of UK Gross Domestic Product (GDP) data underpins the GBP. The Office for National Statistics (ONS) revealed that the UK economy grew at a quarterly pace of 0.1% in the third quarter (Q3), in line with preliminary estimates.

On the other hand, the European Central Bank (ECB) decided to keep all three key interest rates unchanged for the fourth consecutive time at its December meeting. The decision aligns with market expectations. ECB President Christine Lagarde said that monetary policy is in a "good place" and rates will remain steady for a prolonged period. Signals that the ECB rate cut cycle is ending could provide some support to the EUR against the GBP in the near term.

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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