EUR/GBP holds positive ground near 0.8450 after UK CPI data
- EUR/GBP gains momentum to near 0.8445 in Wednesday’s early European session.
- UK CPI inflation eases to 2.5% YoY in December vs. 2.7% expected.
- ECB’s Rehn said it makes sense to continue rate cuts.
The EUR/GBP cross extends the rally to around 0.8445 during the early European trading hours on Wednesday. The Pound Sterling (GBP) weakens against the shared currency after the cooler-than-expected UK Consumer Price Index (CPI) inflation data for December. Later on Wednesday, the Eurozone Industrial Production will be released. Also, the European Central Bank (ECB) Vice President Luis de Guindos will deliver a speech on the same day.
Data released by the United Kingdom’s Office for National Statistics on Wednesday showed that the country’s headline CPI rose 2.5% YoY in December, compared to 2.6% in November. This reading came in softer than the 2.7% expected. The Core CPI, which excludes the volatile prices of food and energy, climbed 3.2% YoY in December versus 3.5% prior, below the market consensus of 3.4%. Meanwhile, the monthly UK CPI inflation increased to 0.3% in December from 0.1% in November. Markets expected a 0.4% print.
The Pound Sterling attracts some sellers in an immediate reaction to the downbeat UK CPI inflation data. Additionally, the concerns about the UK's fiscal sustainability and rising bond yields might continue to undermine the GBP. Analysts expect higher borrowing costs may force the government to rein in spending or raise taxes to meet its fiscal rules, potentially weighing on the UK's future growth.
On the Euro front, the ECB delivered rate cuts four times last year, and traders expect three or four moves in 2025 due to the Eurozone's weak economic outlook. This, in turn, could exert some downward pressure on the Euro against the GBP. The ECB Governing Council member Olli Rehn on Monday said, “Against the backdrop of disinflation being on track and the growth outlook having weakened it makes sense to continue rate cuts.”
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.
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