EUR/GBP posts modest gain above 0.8600 ahead of German inflation data

EUR/GBP trades in positive territory around 0.8625 in Thursday’s early European session.
EU hopes to agree to a US tariff deal 'in coming days.’
The UK monthly GDP report will be published on Friday.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trades with mild gains near 0.8625 during the early European session on Thursday. Optimism around the United States (US)-European Union (EU) deal underpins the Euro (EUR). The German June inflation data will be released later on Thursday. On Friday, the attention will shift to the UK Gross Domestic Product (GDP) report.

The EU said that it hopes to agree to a US tariff deal "in the coming days" that would avoid import taxes Trump has threatened on its goods. Additionally, optimism that the White House will not target the bloc with additional tariffs and that it could secure some exceptions to the baseline rate of 10% might provide some support to the shared currency.

Trump said on Tuesday that the EU will “probably” receive a letter setting its new US tariff rate on Thursday, as the bloc had shifted from being “very tough” to “very nice.”

The Bank of England (BoE) Governor Andrew Bailey said earlier this month that “the path of interest rates will continue to be gradually downwards,” as the UK central bank juggles taming inflation and stoking elusive economic growth. Analysts expect the BoE to cut rates by 25 basis points (bps) at their next policy meeting in August, which would bring the interest rate to 4.0% from 4.25%.

The UK GDP report for May will be closely watched, which is expected to grow by 0.1% MoM in May from a contraction of 0.3% in the previous reading. In case of a stronger-than-expected outcome, this could reduce the chance of a BoE rate reduction, supporting the GBP.

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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