EUR/GBP weakens below 0.8650 as traders await ECB, BoE rate decisions
- EUR/GBP softens to around 0.8635 in Wednesday’s early European session.
- ECB is likely to leave its benchmark deposit rate unchanged at 2.00% on Thursday.
- BoE is expected to hold rates in March.
The EUR/GBP cross loses ground to near 0.8635, snapping the four-day winning streak during the early European session on Wednesday. Markets are in a "wait-and-see" mode ahead of the European Central Bank (ECB) and the Bank of England (BoE) interest rate decisions later on Thursday.
The ECB is expected to maintain its benchmark deposit rate at 2.0%. Traders will closely monitor the press conference for guidance from policymakers. Hawkish remarks from ECB officials could boost the Euro (EUR) against the Pound Sterling (GBP) in the near term.
Interest rate futures are fully pricing a rate hike by the end of July and about a 55% chance of a second one by the end of December. But economists polled by Reuters March 9-13 stuck to their long‑held view of steady rates.
On the UK front, the BoE is anticipated to keep its key interest rate unchanged at 3.75% at the March meeting on Thursday. Analysts said that the size and persistence of the energy price shock will determine its ultimate impact on inflation, inflation expectations, and the BoE’s response. Bank of America economists now expect two Bank Rate cuts in June and September, delayed from its previous forecast of March and June.
The UK jobs data will also be in the spotlight on Thursday. The ILO Unemployment Rate is projected to rise to 5.3% in January from 5,2% in December. Any signs of strength in the UK labor market could lift the Pound Sterling against the Euro in the near term.
ECB FAQs
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.
In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.