EUR/GBP drifts higher to near 0.8750 on UK political uncertainty, German CPI inflation looms

EUR/GBP trades in positive territory around 0.8750 in Friday’s early European session.
The Green Party won the Gorton and Denton by-elections.
Traders await the preliminary reading of German CPI inflation for February later on Friday.

Lallalit Srijandorn FXStreet

The EUR/GBP cross holds positive ground near 0.8750 during the early European session on Friday. The Pound Sterling (GBP) softens against the Euro (EUR) amid a combination of UK political uncertainty and expectations of monetary easing by the Bank of England (BoE). Traders brace for the preliminary reading of Consumer Price Index (CPI) inflation data from Germany, which will be released later on Friday.

The Green Party has pulled off a landmark victory in the Gorton and Denton byelection, a significant blow to Keir Starmer, per the Guardian. Hannah Spencer took the seat from Labour in the Greens' first-ever Westminster by-election victory. A defeat for the Labour Party could trigger leadership speculation and further weigh on the Pound Sterling.

Furthermore, growing bets on the BoE rate cut might contribute to the GBP’s downside. Governor Andrew Bailey said on Tuesday that an interest rate cut in March is a "genuinely open question," although service price inflation in recent data had not fallen as much as hoped. Many economists from financial institutions like Deutsche Bank, ING, and UBS anticipate the next reduction will occur at the March or April meeting.

The preliminary reading of German CPI inflation will be in the spotlight on Friday. If inflation surprises to the downside, it would boost the case for a further rate cut by the European Central Bank (ECB) to support growth. This, in turn, could drag the EUR lower 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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