EUR/GBP rebounds near 0.8450 as investors raise bets on BoE rate cuts
- EUR/GBP trades with mild gains around 0.8440 in Friday’s early European session.
- The BoE is anticipated to reduce its borrowing costs from a 16-year high on August 1.
- French and German declines in business confidence increase the probability of an ECB rate reduction.
The EUR/GBP cross recovers to 0.8440 during the early European session on Friday. The Pound Sterling (GBP) edges lower amid rising bets that the Bank of England (BoE) would cut its interest rate next week.
Investors are betting on a 45% chance of a quarter-point rate cut by the BoE at its upcoming policy meeting on August 1. UBS analysts noted that the BoE is expected to deliver the first 25 basis points (bps) cut in early August and another 25 bps in November, bringing the interest rate to 4.75% by the end of 2024. “The key reason why we expect the MPC to cut rates is the recent data,” said UBS analysts.
On the other hand, the decline in French and German business confidence has raised the potential of the European Central Bank (ECB) cutting interest rates in September, amid warnings that the Eurozone's two biggest economies are about to enter an economic downturn. On Thursday, the German IFO Institute business confidence dropped from 88.6 in June to 87 in July, its lowest level since February, worse than the economists’ forecasts of 88.9.
Market players will take more cues from the preliminary Eurozone Gross Domestic Product (GDP) for the second quarter (Q2). The quarterly Eurozone GDP number is expected to expand by 0.2% QoQ in Q2, compared to the previous reading of 0.3% QoQ.
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, 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).
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.
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