EUR/GBP softens to near 0.8650 ahead of German, Eurozone PMI releases

EUR/GBP edges lower to around 0.8650 in Thursday’s early European session.
Tariff uncertainty between the US and EU undermines the Euro against the Pound Sterling.
Rising market anxieties over the UK's debt position might help limit the EUR/GBP’s losses.

Lallalit Srijandorn FXStreet

The EUR/GBP cross loses ground to near 0.8650, snapping the four-day winning streak during the early European session on Thursday. The HCOB Services and Composite PMI reports from Germany and the Eurozone will be the highlights later on Thursday.

Inflation in the Eurozone edges up in June, hitting the European Central Bank’s (ECB) target and raising expectations that policymakers will leave the key interest rate unchanged later this month. Financial markets forecast one more ECB rate reduction to 1.75% toward the end of the year, followed by a period of steady rates before potential hikes around the end of 2026.

The US made a fresh proposal to the European Union’s (EU) negotiation team last week. European negotiators will meet with their US officials later this week, hoping to reach an agreement in the following days. European officials expect an update about trade talks on Friday, but the situation remains unsettled. The trade tariff uncertainty between the US President Donald Trump's administration and the Eurozone could dampen the sentiment and drag the shared currency lower in the near term.

On the other hand, the British bonds had their biggest selloff since October 2022, and the Pound Sterling (GBP) faces some selling pressure after the UK government sharply scaled back plans to cut benefits. Recent market reaction reflects the market concerns about the credibility of the government to bring down fiscal deficits. Rising market anxieties over the UK's debt position might weigh on the GBP in the near term and create a tailwind for the major pair.

“It’s not just the British pound that is sharply lower but the gilts are under a lot of pressure as well. I think it’s just a crisis of confidence in the Labour government,” said Marc Chandler, chief market strategist at Bannockburn Global Forex LLC.

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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