EUR/GBP holds steady above 0.8600 ahead of UK local elections

EUR/GBP flat lines around 0.8635 in Wednesday’s early European session.
Traders brace for the local elections in the UK on Thursday.
ECB kept interest rates unchanged last week, but signaled that a rate hike in June is increasingly likely due to rising inflation.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trades on a flat note near 0.8635 during the early European trading hours on Wednesday. Traders prefer to wait on the sidelines ahead of the upcoming UK local elections on Thursday.

Voters will elect representatives to the Scottish Parliament (Holyrood) and the Senedd in Wales. Uncertainty regarding the election results has contributed to UK government bond yields (gilts) hitting their highest levels in nearly 30 years.

Commerzbank analysts suggest that a poor performance for the Labour government could increase political risk, potentially pushing EUR/GBP toward 0.8900 in the coming weeks.

Both the European Central Bank (ECB) and Bank of England (BoE) held the interest rates steady at their April policy meeting last week. However, the ECB has adopted a more hawkish tone, hinting at potential hikes this year. This, in turn, could provide some support to the Euro (EUR) against the Pound Sterling (GBP).

ECB policymakers Joachim Nagel said on Monday that the ECB may need to raise interest rates in June if the inflation outlook does not improve significantly in the coming weeks.

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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