EUR/GBP hovers around 0.8400, remains below over two-month high set on Monday

EUR/GBP turns positive for the fifth straight day on Tuesday, though it lacks follow-through.
Stagflation fears and UK fiscal concerns continue to weigh on the GBP and support the cross.
Traders look forward to a scheduled speech by BoE’s Breeden for short-term opportunities.

Haresh Menghani FXStreet

The EUR/GBP cross attracts some dip-buyers on Tuesday and stalls the previous day's modest pullback from the vicinity of the 200-day Simple Moving Average (SMA), or a two-and-half-month top. Spot prices turn positive for the fifth successive day heading into the European session, with bulls looking to build on the intraday move-up beyond the 0.8400 mark.

The British Pound (GBP) continues with its relative underperformance in the wake of the risk of stagflation – a combination of high inflation and weak economic growth. Furthermore, concerns over the UK’s fiscal situation, amid a surge in UK borrowing costs, contribute to denting sentiment surrounding the GBP and turn out to be a key factor acting as a tailwind for the EUR/GBP cross.

The shared currency, on the other hand, struggles to gain any meaningful positive traction on the back of the European Central Bank's (ECB) dovish bias and concerns about the faltering Eurozone economy. In fact, the ECB cut interest rates for the fourth time in December and left the door open to further easing in 2025. This, in turn, is holding back bulls from placing fresh bets around the EUR/GBP cross.

Moving ahead, there isn't any relevant market-moving economic data due for release from the UK or the Eurozone on Tuesday. Hence, the focus will remain glued to the Bank of England (BoE) Deputy Governor Sarah Breeden's scheduled speech, which will influence the GBP and provide some meaningful impetus to the EUR/GBP cross ahead of the UK consumer inflation figures on Wednesday.

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

Haresh Menghani

FXStreet

Haresh Menghani is a detail-oriented professional with 10+ years of extensive experience in analysing the global financial markets.

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