EUR/GBP gains traction to near 0.8550 on downbeat UK Retail Sales data

EUR/GBP gains ground to around 0.8545 in Friday’s early European session.
The UK Retail Sales declined 2.7% MoM in May, weaker than expected.
ECB’s Villeroy said the central bank should watch Oil price in setting rates.

Lallalit Srijandorn FXStreet

The EUR/GBP cross holds positive ground near 0.8545 during the early European session on Friday. The Pound Sterling (GBP) weakens against the Euro (EUR) after the weaker-than-expected UK economic data. Later on Friday, the Economic Bulletin and preliminary reading of Consumer Confidence from the Eurozone will be published.

Data released by the Office for National Statistics (ONS) showed on Friday that the UK Retail Sales fell 2.7% MoM in May versus a rise of 1.3% prior (revised from 1.2%). This figure came in below the market consensus of a decline of 0.5%. On an annual basis, Retail Sales declined 1.3% in May compared to a rise of 5.0% prior, worse than the estimation of an increase of 1.7%. The GBP attracts some sellers in an immediate reaction to the downbeat UK Retail Sales data.

The Bank of England (BoE) decided to keep rates at 4.25% at its June policy meeting on Thursday, as widely expected. BoE Governor Andrew Bailey said that interest rates remain on a gradual downward path, but warned "the world is highly unpredictable.”

The central bank emphasized the concerns over the conflict between Israel and Iran, which could send overall prices up and would impact further rate decisions. Economists polled by Reuters anticipate BOE policymakers to cut rates by 25 basis points (bps) at the next meeting in August, and to reduce another 25 bps in the fourth quarter.

On the Euro front, the hawkish tone surrounding the European Central Bank’s (ECB) policy outlook has lifted the shared currency. ECB President Christine Lagarde noted that rate reductions are coming to an end as the central bank is now “in a good position” to deal with prevailing uncertainties. Meanwhile, the ECB Governing Council member Francois Villeroy de Galhau said earlier this week that the central bank needs to assess fluctuations in oil prices and the euro as it sets borrowing costs.

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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