EUR/GBP weakens to near 0.8700, French government plans to postpone pension reforms

EUR/GBP softens to near 0.8705 in Wednesday’s early European session.
Political uncertainties in France undermine the Euro against the Pound Sterling.
Signs of a cooling UK labor market have boosted expectations for more rate cuts by the BoE in the remainder of the year.

Lallalit Srijandorn FXStreet

The EUR/GBP cross drifts lower to around 0.8705 during the early European session on Wednesday. The Euro (EUR) remains weak against the Pound Sterling (GBP) after France’s President Emmanuel Macron reappointed Sébastien Lecornu as Prime Minister. The Eurozone Industrial Production data for August will be released later on Wednesday.

Lecornu suspended a landmark 2023 pension reform until after the 2027 presidential election in a bid to end the political turmoil that has gripped the country for months. The reappointment was widely seen as a temporary measure. Traders are concerned that Lecornu’s weak government can survive long enough to deliver a meaningful budget or political stability. This, in turn, could undermine the EUR against the GBP in the near term.

On the other hand, the UK Unemployment Rate unexpectedly rose and wage growth slowed more than expected in new data released on Tuesday. This employment report prompted traders to add to bets on further interest-rate cuts from the Bank of England (BoE), which might cap the upside for the GBP. Traders expect the UK central bank to cut interest rates further by 46 basis points (bps) this year, according to Reuters.

The UK Unemployment Rate climbed to 4.8% in the three months through August, the highest since May 2021, the Office for National Statistics showed Tuesday. Economists had expected it to remain unchanged. Meanwhile, wage growth in the private sector declined to 4.4%, the lowest since the end of 2021 and below the 4.5% forecast.

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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