- EUR/GBP softens to near 0.8325 in Friday’s early European session.
- UK economy grew by 0.1% QoQ in Q4, beating expectations after recording zero growth in the previous reading.
- Investors await the preliminary reading of the Eurozone Q4 GDP report, which is due later on Friday.
The EUR/GBP cross trades in negative territory for the second consecutive day around 0.8325 during the early European session on Friday. The upbeat UK Gross Domestic Product (GDP) data for the fourth quarter (Q4) provides some support to the Pound Sterling (GBP).
The UK GDP expanded by 0.1% between October and December, surpassing forecasts of a 0.1% decline, the Office for National Statistics (ONS) showed on Thursday. In December alone, GDP rose by 0.4% MoM, compared to 0.1% expansion in November.
BoE officials have been guiding a cautious approach to interest rate cuts as they are concerned about the persistence of inflationary pressure. BoE Chief Economist Huw Pill said on Thursday that he “urges caution on interest rate cuts” because the long process of wrestling down inflation is not yet complete.
On the Euro front, the potential trade war between Europe and the US could drag the shared currency lower. US President Donald Trump unveiled a roadmap on Thursday for charging reciprocal tariffs against every country that imposes duties on US imports. Nonetheless, commerce and economics officials need to study reciprocal tariffs against countries that place tariffs on US goods, and it will not be due until April 1.
Later on Friday, the preliminary reading of the Eurozone GDP for Q4 will be published. The Eurozone economy is estimated to grow 0.9% YoY in Q4. In case of a stronger-than-expected outcome, this could lift the Euro (EUR) against the GBP in the near term.
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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