EUR/GBP holds positive ground above 0.8650 on hotter-than-expected German CPI data

EUR/GBP strengthens to near 0.8660 in Monday’s early European session.
The French PM will hold a confidence vote on September 8, bringing back fears of recession.
Analysts expect the BoE will not cut interest rates for the remainder of the year.

Lallalit Srijandorn FXStreet

The EUR/GBP cross gains momentum to around 0.8660 during the early European trading hours on Monday. The hotter-than-expected preliminary reading of Germany’s Consumer Price Index (CPI) report provides some support to the Euro (EUR). The European Central Bank (ECB) President Christine Lagarde is scheduled to speak later on Monday.

The recent German inflation data showed that the country’s CPI rose 2.2% YoY in August, compared to 2.0% in July, exceeding the estimation of 2.1%. The HICP climbed 2.1% YoY in August versus 1.8% prior, above the consensus of 2.0%. The rise in inflation has led to uncertainty regarding future ECB actions and prompted investors to reassess the likelihood of ECB rate cuts.

Nonetheless, France faces a new political crisis as Prime Minister François Bayrou is expected to lose a confidence vote. Opinion polls from Reuters showed that most French people now want new national elections, pointing to deepening dissatisfaction with politics and a risk of lasting uncertainty. This, in turn, might exert some selling pressure on the shared currency. Traders will take more cues from the flash Harmonized Index of Consumer Prices (HICP) data from the Eurozone, which is due later on Tuesday.

On the other hand, traders reduce their bets on the Bank of England (BoE) interest rate cut after a series of hawkish economic data, which might support the GBP. BoE Monetary Policy Committee (MPC) member Catherine Mann last week also argued in favor of holding interest rates at their current levels for a longer period, with inflationary pressures turning out to be persistent.

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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