- EUR/GBP looks to build on Friday’s bounce from the 0.8500 neighborhood.
- Hopes for a UK-US trade deal favor the GBP bulls and might cap the cross.
- The divergent BoE-ECB policy expectations could further act as a headwind.
The EUR/GBP cross attracts some buyers during the Asian session on Monday, though it lacks bullish conviction and remains close to a nearly three-week low around the 0.8510 region touched on Friday. Spot prices currently trade just below mid-0.8500s, up less than 0.10% for the day.
The British Pound's (GBP) relative underperformance against its European counterpart could be attributed to comments from the UK Finance Minister Rachel Reeves, stating that Britain's government is not in a rush to secure a trade deal with the US. This, in turn, is seen as a key factor acting as a tailwind for the EUR/GBP cross. Investors, however, remain hopeful that the UK will strike a deal with the US.
Adding to this, data released on Friday showed that UK Retail Sales unexpectedly rose by 0.4% in March following the previous month's downwardly revised growth of 0.7%. This, along with expectations that the Bank of England (BoE) will cut interest rates more slowly than other major central banks, including the European Central Bank (ECB), should limit the GBP losses and cap the upside for the EUR/GBP cross.
The ECB earlier this month warned that economic growth will take a big hit from US tariffs and bolstered the case for further policy easing in the months ahead. This, in turn, warrants some caution before placing fresh bullish bets around the EUR/GBP cross and confirming that the recent corrective pullback from the 0.8735-0.8740 area, or the highest level since November 2023 touched earlier this month, has run its course.
Pound Sterling FAQs
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).
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.
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.
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.
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