- In early European trading on Wednesday, EUR/GBP remained flat around 0.8440.
- The euro fell after President Trump vowed to impose tariffs on the EU.
- Britain's unemployment rate rose in the three months to November, raising the possibility that the Bank of England will cut interest rates next month.
Early in European trading on Wednesday, the euro/pound cross was stable around 0.8440. US President Donald Trump's tariff threats could cause the price of the euro (EUR) against the British pound (GBP) to fall in the short term. However, it is now increasingly likely that the Bank of England (BoE) will cut interest rates next month, potentially limiting the downside of the cross. Investors will be closely monitoring European Central Bank (ECB) President Lagarde's speech later on Wednesday.
President Trump vowed Tuesday to impose tariffs on the European Union and said his administration was discussing 25% tariffs on Canada and Mexico as well as tariffs on China. European Union Economic Commissioner Valdis Dombrovskis said on Wednesday that Europe would respond accordingly to any tariffs imposed by President Trump.
“If it is necessary to protect our economic interests, we will respond in a proportionate manner,” Dombrovskis said. Concerns over a slowing euro zone economy and uncertainty over President Trump's tariff threats could put some selling pressure on the common currency.
Meanwhile, financial markets are betting that a rate cut is more likely at the BoE meeting after recent UK labor market data showed rising unemployment and wage growth. This could weigh on the pound and limit the downside of the cross. The market has priced in a nearly 91% chance of a rate cut at the Feb. 6 meeting. “We still think the Bank of England will cut interest rates at its next meeting in February, from 4.75% to 4.50%, and will continue to do so gradually thereafter,” analysts at Capital Economics said. pointed out.
Frequently asked questions about the British pound
Pound Sterling (GBP) is the world's oldest currency (886 AD) and is the official currency of the United Kingdom. According to 2022 data, foreign exchange (FX) trade volume is the fourth largest in the world, accounting for 12% of all trades and an average of $630 billion per day. Its main trading pairs are GBP/USD, also known as the “cable”, which accounts for 11% of FX, GBP/JPY (3%), known as the “dragon” among traders, and EUR/GBP (2%) . %). Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the British pound is monetary policy, as determined by the Bank of England. The Bank of England's decision will be based on whether it has achieved its main objective of “price stability,'' or a stable inflation rate of around 2%. The main tool for achieving this is interest rate adjustment. If inflation is too high, the BoE will try to control it by raising interest rates, making credit more costly for people and businesses. This is generally positive for the pound, as rising 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 that economic growth is slowing. In this scenario, the BOE would consider lowering interest rates to make credit cheaper so companies can borrow more to invest in growth-generating projects.
The data release measures the health of the economy and could impact the value of the pound. Indicators such as GDP, manufacturing and services PMI, and employment can all influence the direction of GBP. A strong economy is good for the pound. As well as attracting more overseas investment, that could prompt the BoE to raise interest rates, which could directly lead to stronger sterling. Otherwise, if economic indicators are weak, the pound may weaken.
Another important piece of data about the British pound is its trade balance. This indicator measures the difference between what a country earns from exports and what it spends on imports over a given period of time. If a country produces highly sought-after export goods, its currency will benefit purely from the additional demand generated from foreign buyers looking to purchase these goods. Therefore, if the net trade balance is positive, the currency strengthens, and vice versa if it is negative.
