EUR/GBP declines as central bank divergence keeps the cross range bound
- EUR/GBP softens within its one-week range amid a subdued tone across FX markets.
- BoE rate cut expectations build ahead of next week’s meeting, limiting upside in GBP.
- ECB officials adopt a firmer tone, supporting speculation that the next policy move could be a hike.
The Euro (EUR) edges lower against the British Pound (GBP) on Wednesday, with EUR/GBP oscillating within its familiar one-week range as caution dominates broader FX markets ahead of the Federal Reserve’s (Fed) interest rate decision later in the day.
At the time of writing, the cross is trading near 0.8730, easing after touching an intraday high of 0.8751 during early European trading hours.
With the Fed poised to cut rates, traders are waiting for fresh guidance on the outlook for 2026. Any adjustment in the policy path could reshape global rate differentials and broader market sentiment, creating spillover effects across major currency crosses, including EUR/GBP.
At the same time, attention is gradually turning toward next week’s monetary policy meetings from the European Central Bank (ECB) and the Bank of England (BoE).
Markets widely expect the BoE to cut rates at its upcoming meeting. BoE commentary this week, however, reveals internal divergence. Policymaker Alan Taylor said he expects UK inflation to fall back to the 2% target in the near term, which he believes creates scope for additional rate reductions.
Deputy Governor Clare Lombardelli struck a more cautious tone, noting that some upside risks to inflation remain and arguing that the pace of cuts may need to slow as the BoE nears the end of its current cutting cycle.
In the eurozone, the ECB is expected to keep all three key policy rates unchanged next week. Even so, speculation is building around the possibility of a rate hike next year after a series of firmer remarks from ECB policymakers.
Governing Council member Gediminas Simkus said earlier on Wednesday that there is no need to change rates while inflation is running at the target. His comments were followed by a Bloomberg interview published Monday, in which Isabel Schnabel said she is “rather comfortable” with market expectations that the ECB’s next move could eventually be a hike.
Adding to the recent commentary, ECB President Christine Lagarde said on Wednesday that the eurozone economy is showing signs of resilience and that the Governing Council may upgrade its growth projections at the December meeting.
She noted that the current policy stance remains appropriate given inflation’s sustained progress toward the target, while also emphasising that the ECB will continue to rely on incoming data to determine the timing of any future adjustment.
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
Vishal Chaturvedi
FXStreet
I am a macro-focused research analyst with over four years of experience covering forex and commodities market. I enjoy breaking down complex economic trends and turning them into clear, actionable insights that help traders stay ahead of the curve.
