EUR/GBP extends the rally above 0.8350 amid UK fiscal concerns
- EUR/GBP climbs to around 0.8375 in Friday’s early European session.
- Pound falls after UK borrowing costs hit their highest for 16 years.
- The Eurozone December inflation data has pushed back expectations that the ECB will deliver a jumbo rate cut.
The EUR/GBP cross extends its upside to near 0.8375 during the early European session on Friday. The Pound Sterling (GBP) remains under selling pressure amid concerns about the UK's fiscal outlook and the Bank of England's (BoE) ability to control inflation.
The significant depreciation of the GBP came after a rise in the yields of the UK benchmark 10-year treasury bonds to their highest level since 2008. The high costs of UK debt have raised significant concerns about the financial situation in the UK, resulting in a sharp decline in the British pound.
The sharp fall of the GBP followed a rise in yields of the UK benchmark 10-year treasury bonds to their highest level since 2008. The high costs of UK debt have prompted serious worries about the UK's financial condition, resulting in a sharp decline in the GBP. Bank of England Deputy Governor Sarah Breeden said on Thursday that recent evidence supported the case to cut interest rates gradually, although it was difficult to know how quickly.
On the Euro front, the Eurozone preliminary Harmonized Index of Consumer Prices (HICP) data for December will likely push the European Central Bank (ECB) to pursue its rate-cutting cycle more cautiously, supporting the shared currency. We project that the ECB will only cut rates once in the first half of this year, with additional cuts concentrated in the latter half of 2025," said Charlie Cornes, senior economist at the U.K.-based Centre for Economics and Business Research.
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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