EUR/GBP jumps above 0.8350 after BoE’s Bailey speech

• EUR/GBP gains traction to around 0.8380 in Thursday’s early European session, up 0.65% on the day. 
• BoE’s Bailey said the UK central bank may become a bit more aggressive on rate cuts. 
• Traders anticipate the ECB to cut the interest rates in October. 

The EUR/GBP cross rebounds to near 0.8380 during the early European session on Thursday. The Pound Sterling (GBP) loses ground after Bank of England (BoE) Governor Andrew Bailey’s speech. 

On Thursday, the BoE’s Bailey said that the UK central bank could become a “bit more aggressive” and “more activist” on rate reduction if there’s further progress on inflation. Bailey further stated that he will closely monitor the Middle East developments. The dovish remarks from Bailey exert some selling pressure on the GBP and create a tailwind for EUR/GBP. 

The BoE held interest rates at 5.0% in the September meeting after the first cut in borrowing rates in four years in August. However, investors expect another quarter-point reduction at its November meeting.

The European Central Bank (ECB) president Christine Lagarde reiterated last month that the central bank was “not pre-committing” to additional rates cut, emphasizing that the policymakers will stick to their “data-dependent. The recent Eurozone economic data earlier this week triggers the chance of the ECB rate cuts. The Eurozone inflation fell to 1.8% in September, below the 2% target.  

ECB Governing Council member Kazaks stated that “recent data clearly point in the direction of a cut, but leaned against “exaggerated” market expectations for easing. The markets have priced in nearly 95% odds of an October cut, up from a 25% chance after the September ECB decision.

Investors await the HCOB September Purchasing Managers’ Index (PMI) from Germany and the Eurozone, along with the Producer Price Index (PPI), which is due on Thursday. If the report shows a weaker-than-expected outcome, this could drag the shared currency lower against the GBP. 

Pound Sterling FAQs

What is the Pound Sterling?

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).

How do the decisions of the Bank of England impact on the Pound Sterling?

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.

How does economic data influence the value of the Pound?

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.

How does the Trade Balance impact the Pound?

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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