EUR/GBP softens below 0.8450 as weaker UK data boost BoE rate cut bets
- EUR/GBP drifts lower to near 0.8440 in Monday’s early European session.
- ECB policymakers said the central bank must be prudent with rate cuts given high uncertainty.
- Softer inflation and slower growth in the UK economy pave the path for BoE rate cuts.
The EUR/GBP cross trades with mild losses around 0.8440 during the early European session on Monday. The downbeat UK economic data boost the interest rate cut bets from the Bank of England (BoE), weighing on the Pound Sterling (GBP) against the Euro (EUR). Traders will keep an eye on Germany’s December Producer Price Index (PPI), which is due later on Monday. On Tuesday, the UK Employment data will be in the spotlight.
The ECB emphasised gradual and cautious rate cuts amid economic uncertainties. ECB policymaker Joachim Nagel said on Friday that the central bank should not rush to cut the interest rates as inflation remains high and uncertainty great. Meanwhile, ECB Executive Board member Isabel Schnabel noted that the central bank likely has room to continue lowering borrowing costs as inflation converges toward 2% but must proceed carefully.
The ECB slashed interest rates four times last year, and investors expect another three or four reductions in 2025 as inflation could move closer to its 2% objective in the next months, despite global economic uncertainty.
On the GBP’s front, investors bet on more BoE rate cuts in 2025 after the weaker-than-expected UK Retail Sales and Gross Domestic Product (GDP) last week. These disappointing reports add to the dim economic picture in the United Kingdom, which might exert some selling pressure on the GBP and create a tailwind for EUR/GBP. The BoE is widely anticipated to cut the interest rate by 25 bps at its February meeting. Markets priced in a total of more than 75 basis points (bps) worth of interest rate cuts throughout 2025, up from around 65 bps reductions expected before the data.
Pound Sterling FAQs
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).
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.
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.
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.