EUR/GBP flat lines near 0.8450 amid Trump tariff threats, growing BoE rate cut bets
- EUR/GBP trades flat around 0.8440 in Wednesday’s early European session.
- The Euro weakens after Trump vowed to hit the EU with tariffs.
- UK Unemployment Rate rose in the three months through November, increasing the chance the BoE will cut rates next month.
The EUR/GBP cross holds steady around 0.8440 on Wednesday during the early European trading hours. US President Donald Trump tariff threats could undermine the Euro (EUR) against the Pound Sterling (GBP) in the near term. However, the rising likelihood the Bank of England (BoE) will lower rates next month might cap the downside for the cross. Investors will closely monitor the speech by the European Central Bank’s (ECB) President Lagarde later on Wednesday.
Trump on Tuesday vowed to hit the European Union (EU) with tariffs and said his administration was discussing 25% tariffs against Canada and Mexico, as well as duties on China. Valdis Dombrovskis, the European Union’s commissioner for the economy, said on Wednesday that Europe will respond to any tariffs imposed by Trump in a proportionate way.
“If there is a need to defend our economic interests, we will respond in a proportionate way,” said Dombrovskis. The concerns about an economic slowdown in the Eurozone economy and uncertainty surrounding Trump’s tariff threats could exert some selling pressure on the shared currency.
On the other hand, financial markets see a greater chance of an interest rate cut at the BoE meeting after the recent UK labor market data showed rising rates of Unemployment Rate and wage growth. This, in turn, might weigh on the GBP and cap the downside for the cross. The markets have priced in a nearly 91% odds of reduction at the meeting on February 6. “We still think the Bank of England will cut interest rates at the next meeting in February, from 4.75% to 4.50%, and continue to cut rates gradually thereafter,” noted Capital Economics analysts.
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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