EUR/GBP gains traction above 0.8400 after German inflation data

EUR/GBP rises above 0.8415 in Wednesday’s early session.
German HICP inflation came in at 2.2% in April.
ECB’s Schnabel said the central bank should keep a steady hand and hold rates close to current levels.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trades in positive territory near 0.8415, snapping the seven-day losing streak during the early European trading hours on Wednesday. The Euro (EUR) recovers some lost ground as markets reduce bets on European Central Bank (ECB) interest rate cuts amid easing in trade and geopolitical tensions.

ECB board member Isabel Schnabel, an outspoken policy hawk, said on Friday that the central bank should stop cutting borrowing costs as turmoil in the global economy is fueling price pressures and inflation was at risk of exceeding the ECB's 2% target in the medium term. The less dovish remarks from ECB policymakers, along with the easing tensions after the US-China trade talks, provide some support to the shared currency.

Financial markets see a 90% possibility of a rate cut in June and see another cut or two in subsequent months, indicating that Schnabel's view goes counter to investor bets.

Data released by the Federal Statistics Office reported on Tuesday that the German Harmonized Index of Consumer Prices (HICP) rose 2.2% in April, compared the March’s reading and the consensus of 2.2%. On a monthly basis, the HICP increased by 0.5%, after a 0.5% rise in the previous month.

On the other hand, cooling employment and softening wage growth have triggered the expectation for the Bank of England (BoE) rate cuts. Last week, the BoE decided to lower its borrowing rates by 25 basis points (bps) to 4.25% and retained a “gradual and careful” monetary expansion approach.

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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