EUR/GBP tumbles to near 0.8550 ahead of Eurozone/UK PMI data

EUR/GBP weakens to around 0.8550 in Wednesday’s early European session.
The ECB’s dovish bets weigh on the shared currency.
The US will aim for the UK to lower its automotive tariff and relax rules on agricultural imports.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trades in the negative territory near 0.8550 during the early European session on Wednesday. The dovish stance of the European Central Bank (ECB) weighs on the Euro (EUR) against the Pound Sterling. All eyes will be on the preliminary readings of the April Purchasing Managers Index (PMI) from the UK and the Eurozone, which will be released later on Wednesday.

The rising bets that the ECB could cut interest rates again in the June policy meeting weigh on the shared currency. After policymakers agreed unanimously to cut the benchmark rate by 25 basis points (bps) to 2.25% last week, ECB President Christine Lagarde said that downside risks to economic growth have increased. According to LSEG data, traders are now pricing in nearly a 75% odds of a June rate cut, up from roughly 60% before the ECB's decision.

Meanwhile, ECB policymaker Francois Villeroy de Galhau said on Tuesday that US President Donald Trump’s trade tirades dampen economic growth, including for the US, and threaten to undermine financial stability.

On the GBP’s front, the positive developments surrounding US-UK trade talks provide some support to the GBP. The Wall Street Journal reported late Tuesday that the Trump administration is preparing its terms for trade talks with the UK, aiming for London to reduce levies and other non-tariff barriers on a wide range of US goods.

The US will aim for the UK to reduce its automotive tariff from 10% to 2.5% and will also push the UK to relax rules on agricultural imports from the US, including beef, and revise rules of origin for goods from each nation, according to people with knowledge. However, any signs of uncertainty in trade policy could weigh on 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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