Euro weakens against British Pound as markets pare back ECB hike bets

EUR/GBP softens to near 0.8620 in Thursday’s early European session.
ECB’s Lagarde played down second-round inflation worries.
UK PM Keir Starmer resigned on Monday, raising concerns over the UK political risks.

Lallalit Srijandorn FXStreet

The EUR/GBP cross declines to around 0.8620 during the early European trading hours on Thursday. Dovish remarks from the European Central Bank (ECB) policymakers weigh on the Euro (EUR) against the British Pound (GBP). Traders await the speeches by the ECB’s Philip Lane and Piero Cipollone later on Thursday for fresh impetus.

While the ECB raised its deposit rate by 25 basis points (bps) to 2.25% at its June policy meeting, ECB President Christine Lagarde delivered a more dovish message, saying that the central bank does not need to respond aggressively to Middle East conflict spillovers.

Lagarde added that the inflation shock facing the Eurozone is too large to ignore but not yet large enough to push up longer-term inflation. Markets pare back future ECB hike bets, undermining the EUR. Financial markets have priced between one and two more hikes, with the next move fully priced in by the end of this year.

On the other hand, political instability in the United Kingdom (UK) might drag the GBP lower and act as a tailwind for the cross. UK Prime Minister Keir Starmer resigned on Monday, throwing the country into yet another political crisis. Starmer stepped down under intense pressure following Andy Burnham's victory in the Makerfield by-election last week. His Labour Party will now need to select a new leader to lead the country.

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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