EUR/GBP edges higher above 0.8700 as UK political risks weigh on Pound Sterling

EUR/GBP gains ground to around 0.8715 in Thursday’s early European session.
The Gorton and Denton by-election is taking place later on Thursday.
Eurozone inflation dropped to its lowest level since September 2024.

Lallalit Srijandorn FXStreet

EUR/GBP holds positive ground near 0.8715 during the early European session on Thursday. Political risks in the United Kingdom (UK) drag the Pound Sterling (GBP) lower against the Euro (EUR). Traders will keep an eye on the European Central Bank (ECB) Christine Lagarde speech later on Thursday.

Manchester's Gorton and Denton constituency is set to hold a special election to fill a vacant parliamentary seat on Thursday. This event is seen as a major test for UK Prime Minister Keir Starmer amid internal party discontent and low approval ratings.

"A heavy defeat for the ruling Labour Party could re-ignite speculation over the Labour leadership and again weigh on sterling," said ING's FX strategist Francesco Pesole.

Eurozone inflation eased to 1.7% YoY in January, marking a 16-month low. This report has fueled expectations that the ECB may adopt a more dovish stance, which could weigh on the EUR against the GBP.

Traders await the preliminary reading of the Consumer Price Index (CPI) from Germany on Friday for more clues about the pace of future policy easing. Any signs of cooler inflation in Germany might exert more selling pressure on the EUR 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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