EUR/GBP weakens below 0.8500 amid weaker German Industrial Production, Labour Party wins UK election

EUR/GBP trades with a mild bearish bias around 0.8475 in Friday’s early European session.
Labour Party has won 337 seats in the parliamentary election, implying it now holds a majority in the House of Commons.
Germany’s industrial sector contraction deepened in May.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trades with mild losses near 0.8475 on Friday during the early European session. The Pound Sterling (GBP) edges higher as the UK’s Labour Party led by Keir Starmer appears to be headed for a huge majority in the 2024 UK election, Reuters reported on Friday. Later in the day, Eurozone Retail Sales for May will be released.

The UK’s opposition Labour Party has won 337 seats in the parliamentary election, implying it now holds a majority in the 650-seat strong House of Commons, Reuters reported on Friday, citing broadcaster ITV. Derek Halpenny, head of FX research at MUFG Bank, believes that a Labour victory may benefit the Pound Sterling (GBP). A large majority would give Labour a strong mandate for governing and potentially lead to greater political stability.

Nonetheless, the expectation that the Bank of England (BoE) will start reducing interest rates from the August meeting might drag the Cable lower.

On the Euro front, data released by Destatis reported Friday that German Industrial Production for May came in weaker than the market expectation. The figure dropped 2.5% MoM in May from a decline of 0.1% in the previous reading. On an annual basis, the German Industrial Production fell 6.7% YoY in May

The Euro (EUR) posts modest losses in response to the weaker in outputs of the German factories. Traders will take more cues from the Eurozone Retail Sale data, which is projected to improve to 0.1% YoY in May.

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, aka ‘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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