EUR/GBP dips below 0.8700 on risk aversion, doubts about French government

The Euro eases below 0.8700 against the British Pound, and turns negative on the Daily charts
Investors' concerns about the fragility of France's new cabinet keep the EUR rallies limited.
In the UK, September's employment figures and BoE Bailey's comments might set the GBP's direction on Tuesday.

Guillermo Alcala FXStreet

Euro recovery attempts against the British Pound have been capped at 0.8707 earlier on the day, and the pair retreated to levels right below 0.8700 amid a cautious market mood, although it remains above session lows, at 0.8685 so far.

The Common currency is losing ground across the board on Monday morning, with investors pondering the chances of success of the new cabinet in France, with concerns about a trade war between the US and China curbing risk appetite further.

In France, President Macron has reappointed Sébastien Lecornu as the Prime Minister, who, himself, named Roland Lescure as his finance minister again, to form a cabinet with a high resemblance to the one that lasted 14 hours last week. Investors remain sceptical about their ability to pass a budget through a divided parliament.

Meanwhile, in the US, the looming trade war with China is offsetting news about the peace deal in Gaza, which keeps traders wary of risk. US President Trump attempted to cool off tensions by toning down his rhetoric in a social media tweet, but the Chinese authorities have defended the restrictions on rare earths trade and announced retaliation if Trump’s threat of 100% tariffs comes into effect.

In the UK, later today, BoE MPC member Catherine Mann will meet the press and might give some clues about the bank's monetary policy, although the focus will be on remain on the UK employment data on Tuesday, that will frame BoE Governor Bailey's speech later on the same day.

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

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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