Euro strengthens against British Pound after UK CPI data, traders eye BoE rate decision

EUR/GBP gains traction near 0.8650 in Wednesday’s early European session.
UK headline CPI inflation holds steady in April, rising 2.8% YoY.
Traders will take more cues from the UK jobs data and the BoE rate decision on Thursday.

Lallalit Srijandorn FXStreet

The EUR/GBP cross gathers strength to around 0.8650 during the early European trading hours on Wednesday. The British Pound (GBP) weakens against the Euro (EUR) following the UK inflation report for May. The attention will shift to the UK employment data and the Bank of England (BoE) interest rate decision later on Thursday.

Data released by the Office for National Statistics (ONS) on Wednesday showed that the UK headline Consumer Price Index (CPI) climbed 2.8% YoY in May, versus a rise of 2.8% prior. Meanwhile, the core CPI, excluding volatile food and energy items, rose 2.6% YoY in May, compared to 2.5% in the previous reading. This figure came in softer than the forecast of 2.7%.

The monthly UK CPI inflation eased to 0.2% in May from 0.7% reported in April, below the market consensus of 0.4%. The GBP faces some selling pressure in an immediate reaction to the UK inflation report.

The UK central bank is set to leave the interest rates unchanged at 3.75% on Thursday as Governor Andrew Bailey judges that the UK central bank can take its time to assess if higher energy prices ‌from the Iran war will generate lasting inflation pressure.

On the Euro’s front, the European Central Bank (ECB) last week hiked its key interest rates, saying “the war in the Middle East is generating inflation pressures.” This marks the first rate increase since September 2023, after seven consecutive meetings where interest rates were kept on hold.

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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