EUR/GBP advances to near 0.8450, upside seems limited due to the dovish ECB
- EUR/GBP gains ground despite a dovish sentiment surrounding the ECB regarding its decision in September.
- ECB's François Villeroy de Galhau favors that the central bank should consider cutting rates at its next meeting.
- BRC Like-for-Like Retail Sales rose by 0.8% YoY in August, against the previous 0.3% rise.
EUR/GBP extends its gains for the second successive day, trading around 0.8430 during Tuesday’s European session. However, the upside potential for the EUR/GBP cross may be limited, as the Euro is under pressure amid strong speculation that the European Central Bank (ECB) will cut interest rates in September.
This would mark the second interest rate cut by the ECB since it began shifting toward policy normalization in June. Policymakers remain confident that inflation will gradually return to the bank's 2% target by 2025.
ECB Governing Council member François Villeroy de Galhau stated on Friday, according to Bloomberg, that there are "good reasons" for the central bank to consider cutting its key interest rates in September. Villeroy de Galhau suggested that action should be taken at the upcoming meeting on September 12, noting that it would be both fair and prudent to decide on a new rate cut.
In the United Kingdom (UK), BRC Like-for-Like Retail Sales increased by 0.8% year-on-year in August, up from a 0.3% rise in July, marking the fastest growth in five months. On Monday, the S&P Global UK Manufacturing PMI held steady at 52.5 for August, consistent with preliminary estimates.
The EUR/GBP cross may struggle as traders anticipate no rate cut by the Bank of England (BoE) in the September meeting, while the possibility of a 25 basis points (bps) interest rate cut in the November meeting stands at 87.2%.
Traders await BoE Deputy Governor Sarah Breeden's role as moderator for a panel on supervisory cooperation at a joint conference hosted by the European Central Bank and the European Banking Authority on Tuesday.
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.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
