EUR/GBP holds steady ahead of Eurozone, UK PMI data

EUR/GBP flat lines near 0.8650 in Tuesday’s early European session.
Goldman Sachs analysts expect ECB rate hikes in April and June.
BoE stated it is ready to act to hit the inflation target.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trades on a flat note around 0.8650 during the early European session on Tuesday. The pair faces a volatile session amid escalating geopolitical tensions in the Middle East and shifting expectations for central bank policy. The preliminary readings of the Purchasing Managers' Index (PMI) for March from the United Kingdom (UK) and the Eurozone are due later on Tuesday.

The European Central Bank (ECB) held its key interest rates steady at its March meeting last week, with the deposit rate at 2.00%. Despite the pause, mounting inflation fears driven by the Middle East conflict and soaring energy prices have spurred expectations of rate hikes. Goldman Sachs analysts said it expects the ECB to deliver two 25 basis point (bps) interest rate hikes in April and June, joining peers J.P.Morgan and Barclays.

On the UK’s front, the Bank of England (BoE) decided to leave interest rates unchanged at 3.75% last week. The UK central bank stated that it was "ready to act" to see off risks from war in the Middle East, prompting traders to ramp up their bets on higher ‌borrowing costs later this year.

The attention will shift to the UK February inflation report on Wednesday. The UK Consumer Price Index (CPI) is expected to see an increase of 0.4% MoM in February versus -0.5% prior. If the report shows a hotter-than-expected outcome, this could support the Pound Sterling (GBP) against the Euro (EUR) in the near term.

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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