EUR/GBP posts modest gains above 0.8650 ahead of Eurozone, UK PMI releases

EUR/GBP posts modest gains near 0.8675 in Thursday’s early European session.
The UK CPI inflation climbed to 3.3%YoY in March, driven by higher fuel costs due to the Iran war.
ECB's Simkus said the central bank shouldn't raise interest rates in April.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trades with mild gains around 0.8675 during the early European session on Thursday. However, the potential upside for the cross might be limited due to hot UK inflation data. Traders will keep an eye on the preliminary readings of the Purchasing Managers Index (PMI) from the Eurozone and the United Kingdom (UK).

Data released by the Office for National Statistics (ONS) on Wednesday showed that the UK headline Consumer Price Index (CPI) inflation rose to 3.3% YoY in March, compared to 3.0% in February. This increase marks the first official reflection of the US-Israel war with Iran on the UK's cost of living. The core CPI, excluding volatile food and energy items, climbed 3.1% YoY in March, versus 3.2% prior, below the forecast of 3.2%.

The Bank of England (BoE) is expected to hold the base rate at 3.75% at its next meeting on April 30, though the jump in inflation has fueled speculation of potential future hikes or delayed cuts.

The European Central Bank (ECB) officials are leaning toward leaving interest rates unchanged at the April policy meeting. ECB Governing Council member Martins Kazaks said on Wednesday that the central bank has ‘luxury’ to wait on interest rate rises.

Meanwhile, ECB policymaker Gediminas Simkus reiterated the cautious stance regarding the ECB's monetary policy, saying that while a rate hike in April is unlikely, the door remains open for policy tightening later this year. While a hold is expected in the April policy meeting, Barclays analysts anticipate the focus to shift toward potential 25 basis point (bps) hikes in June and September to combat an energy-driven inflation surge.

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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