EUR/GBP posts modest losses below 0.8800 despite dovish BoE expectations

EUR/GBP trades with mild losses around 0.8795 in Wednesday’s early European session.
UK PM Starmer seeks lower interest rates to boost the economy, which might cap the GBP’s upside.
Eurozone inflation edged higher in November, supporting the ECB to hold the rate.

Lallalit Srijandorn FXStreet

The EUR/GBP cross posts modest losses near 0.8795 during the early European trading hours on Wednesday. Nonetheless, the potential downside for the cross might be limited amid dovish expectations from the Bank of England (BoE), which might weigh on the Pound Sterling (GBP).

Markets expect a potential interest rate cut from the UK central bank in December. Concerns over higher overall taxation levels following the announcement of the UK autumn budget, along with softer inflation and a cooling labor market, add weight to the prospect of further BoE policy shifts. This, in turn, could exert some selling pressure on the GBP in the near term.

UK Prime Minister Keir Starmer highlighted the need to bring inflation and interest rates down to boost business investment and economic growth. A majority of analysts expect the BoE to reduce its interest rates to 3.75% in December, with markets pricing in a 90% probability, according to Reuters.

Eurozone inflation unexpectedly ticked up in November, suggesting that further rate cuts from the European Central Bank (ECB) are unlikely under current economic conditions. The ECB left its main interest rates unchanged at its meetings in September and October, with the deposit rate remaining at 2.00%. The EUR could receive support from the growing acceptance that the ECB is done cutting interest rates. ECB President Christine Lagarde said last week that borrowing costs are at the "right level."

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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