EUR/GBP gathers strength above 0.8700 ahead of Eurozone/UK PMI releases

EUR/GBP strengthens near 0.8735 in Tuesday’s early European session.
UK fiscal concerns weigh on the Pound Sterling and create a tailwind for the cross.
Eurozone Consumer Confidence improved to -14.9 in September, stronger than expected.

Lallalit Srijandorn FXStreet

The EUR/GBP cross extends the rally to around 0.8735 during the early European session on Tuesday. The Pound Sterling (GBP) softens against the Euro (EUR) amid rising UK fiscal worries, following a significant increase in Britain’s public borrowings. Traders will keep an eye on the preliminary reading of Purchasing Managers’ Index (PMI) reports for September from the Eurozone and the UK later on Tuesday.

The latest public finance figures showed that public sector net borrowing hit £18 billion, the highest for the month in five years. Economists expected government borrowing to come in significantly lower at £12.8 billion. Analysts believe that the move threatens to worsen the debt burden and intensify fiscal risks, which might exert some selling pressure on the GBP and create a tailwind for the cross.

The upbeat Eurozone Consumer Confidence data released on Monday provides some support to the shared currency. The Consumer Confidence in the Euro area improved to -14.9 in September, compared to the previous reading of -15.5 and better than the expectation of -15.3.

However, the escalating geopolitical tension in Russia could weigh on the EUR due to Europe’s close economic and energy ties with Russia. The EU’s Kaja Kallas said it is no accident that Russia violated European airspace three times in two weeks, adding that if Russian planes are violating airspace, every country has the right to defend itself. Meanwhile, Russia dismissed alleged violations of airspace by Russian jets, calling the claims baseless and aimed at escalating tensions, per Reuters.

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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