EUR/GBP strengthens above 0.8650 as traders raise bets on BoE rate cut

EUR/GBP trades on a positive note around 0.8655 in Friday’s early European session.
Investors remain confident that the BoE will cut rates next month after the Unemployment Rate rose to a four-year high.
The ECB is expected to wait until December to make the final rate cut.

Lallalit Srijandorn FXStreet

The EUR/GBP cross gains ground to near 0.8655 during the early European session on Friday. The Pound Sterling (GBP) edges lower against the Euro (EUR) as the UK Unemployment Rate hits the highest level in four years. Traders await the German Producer Price Index (PPI) and the Eurozone Current Account, which will be published later on Friday.

The UK Unemployment Rate ticked higher to 4.7% in the three months to May versus 4.5% prior, the UK Office for National Statistics reported on Thursday. This figure came in below the expectations of 4.6% during the reported period. Analysts expect the UK jobs market to continue to weaken, making the prospect of a Bank of England (BoE) interest rate cut next month even more likely. This, in turn, could exert some selling pressure on the GBP in the near term.

Money markets are now pricing in nearly an 89% odds that the UK central bank will lower borrowing costs in August, up from an 87% chance on Wednesday. Analysts expected the BoE to deliver two interest rate reductions by the end of the year, which would take the bank rate down to 3.75%.

On the Euro front, the European Central Bank (ECB) is anticipated to delay its final interest-rate cut until December without investors concluding in the meantime that easing is over, a Bloomberg survey of economists showed. ECB President Christine Lagarde stated that the central bank is in a “good place” to navigate any challenges to economic growth and inflation that may arise. However, there’s less of a consensus beyond the summer. Traders see a less than 50% possibility of a reduction in September. A rate cut is almost fully priced by year-end.

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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