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18 Dec 2024
EUR/GBP attracts some buyers above 0.8250 after UK CPI inflation data
- EUR/GBP gathers strength to around 0.8275 in Wednesday’s early European session, adding 0.27% on the day.
- The UK annual CPI jumped 2.6% in November vs. 2.6% expected.
- ECB President Christine Lagarde hinted at potential rate cuts as inflation risks ease.
The EUR/GBP cross holds positive ground near 0.8275, snapping the two-day losing streak during the early European session on Wednesday. The Pound Sterling (GBP) weakens after the UK November Consumer Price Index (CPI) inflation data. Later on Wednesday, traders will keep an eye on the Eurozone Harmonized Index of Consumer Prices (HICP) report.
Data released by the Office for National Statistics (ONS) on Wednesday showed that the UK CPI rose by 2.6% YoY in November, compared to a 2.3% growth seen in October. The reading was in line with the market consensus of 2.6% and stayed well above the Bank of England’s (BoE) 2.0% target.
Meanwhile, the Core CPI, excluding volatile food and energy items, climbed by 3.5% YoY in November versus a 3.3% increase in October, missing the estimation of 3.6%. On a monthly basis, the UK CPI inflation eased to 0.1% in November from 0.6% in October. The markets expect a 0.1% print in the reported month. The UK inflation report failed to boost the GBP and acts as a tailwind for EUR/GBP.
The European Central Bank (ECB) lowered its key rates last week for the fourth time this year and signaled for further rate cuts as inflation risks ease. During the press conference, the ECB President Christine Lagarde said, “The direction of travel is clear, and we expect to lower interest rates further.” The dovish remarks from the ECB policymakers might weigh on the Euro (EUR) against the GBP. Furthermore, the concerns about the weak economy and uncertainty about potential tariffs in the US could contribute to the shared currency’s downside.
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.