Key Moments
- EUR/GBP trades near 0.8725, rebounding after a three-day decline early in the European session.
- The upcoming UK by-election in Manchester’s Gorton and Denton serves as a key test for Prime Minister Keir Starmer and the Labour Party.
- Meanwhile, renewed US-EU trade tensions and a delayed trade vote could weigh more on the Euro than on the Pound.
EUR/GBP Supported Above 0.8700
EUR/GBP trades on firmer footing near 0.8725, ending a three-session losing streak in early European trading on Wednesday. The Pound Sterling (GBP) weakens against the Euro (EUR) as investors focus on political risks in the United Kingdom. At the same time, markets await remarks from European Central Bank President Christine Lagarde later in the day.
UK Political Risks Shift Sentiment Toward the Euro
Political attention centers on the Gorton and Denton constituency in Manchester, where a special election will fill a vacant parliamentary seat on Thursday. Investors view the vote as a key test for UK Prime Minister Keir Starmer amid internal party tensions and weak approval ratings.
ING FX strategist Francesco Pesole warned that a heavy defeat for the ruling Labour Party could revive leadership speculation and weigh on sterling. Consequently, political uncertainty continues to pressure the Pound.
US-EU Trade Tensions Cloud Euro Outlook
On the Euro side, sentiment reflects recent trade developments involving the United States. The US Supreme Court invalidated many tariffs introduced by President Donald Trump. However, Trump later announced an additional 15% tariff, renewing trade concerns.
As a result, European policymakers reacted quickly. On Monday, the European Parliament delayed a vote on the EU-US trade agreement in response to rising tensions. This delay heightened fears of a renewed trade conflict.
These risks could weigh more heavily on the Euro than on the Pound. The Eurozone remains more exposed to global trade disruptions, while the UK economy is relatively less dependent on EU-US trade flows. Therefore, EUR/GBP gains may remain limited despite UK political headwinds.
| Factor | Impact on EUR/GBP |
|---|---|
| UK by-election in Gorton and Denton | Political risk pressures GBP and supports EUR/GBP |
| US tariff changes | New tariffs renew trade tensions and cloud EUR outlook |
| Delayed EU-US trade vote | Raises fears of conflict, potentially negative for EUR |
Background: Pound Sterling and Key Drivers
What Is the Pound Sterling?
The Pound Sterling (GBP) is the official currency of the United Kingdom and the world’s oldest continuously used currency, dating back to 886 AD. It is the fourth most traded currency globally, accounting for about 12% of FX transactions and averaging $630 billion in daily turnover, based on 2022 data.
Major GBP currency pairs include:
- GBP/USD, known as “Cable,” accounting for about 11% of FX turnover
- GBP/JPY, often called the “Dragon,” with roughly a 3% share
- EUR/GBP, representing about 2% of global FX activity
The Bank of England (BoE) issues and manages the Pound Sterling.
Bank of England Policy and Its Influence on GBP
The Bank of England’s monetary policy remains the primary driver of the Pound’s value. The BoE aims to maintain price stability, defined as inflation near 2%. To achieve this, it adjusts interest rates.
- When inflation rises above target, the BoE raises interest rates. Higher rates increase borrowing costs but often support GBP by attracting foreign investment.
- When inflation falls and growth slows, the BoE may cut rates. Lower rates encourage borrowing but typically weaken the Pound.
Role of Economic Data in Shaping Sterling Moves
Economic indicators provide important signals for the Pound’s direction. Key data include GDP, Purchasing Managers’ Indexes (PMIs), and labor market reports.
- Strong data tends to support GBP by attracting investment and raising expectations of tighter policy.
- Weak data often pressures GBP by lowering rate expectations and signaling economic softness.
Trade Balance and Its Effect on the Pound
The trade balance measures the gap between exports and imports over a given period. It remains a key indicator for the Pound.
- A trade surplus strengthens a currency because foreign buyers must purchase the domestic currency.
- A trade deficit tends to weaken the currency due to higher demand for foreign currencies.
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