EUR/GBP gives away gains, retreats to 0.8250 on dovish ECB

The Euro turns negative on the day weighed by dovish comments by ECB officials.
ECB's Lane and Wunsch have hinted to more rate cuts in 2025.
The BoE is expected to keep a less dovish outlook amid a resilient UK economy and higher inflationary trends.

Guillermo Alcala FXStreet

The Euro has given away previous gains and is practically unchanged on the daily chart as ECB speakers, Lane and Wunsch have hinted at further rate cuts by the European Central Bank.

ECB’s Chief Economist Philip Lane refused to pre-commit to any particular rate path but remained confident that inflation is coming to track, while financing conditions remain restrictive.

In a more straightforward language, ECB committee member, Pierre Wunsch has signaled four more interest rate cuts to a terminal rate of about 2%.

The BoE will target a higher terminal rate

These comments confirm the market view that the European Central Bank will cut interest rates more aggressively than the Bank of England. The weak economic outlook in the region and the uncertain political scenario in Germany and France are pressuring the ECB to ease borrowing costs to stimulate economic growth.

In the UK, on the other hand, the economy is showing a more encouraging outlook. Employment grew beyond expectations with wages surging in the three months to October, Inflation picked up in November, also if the acceleration of the core CPI failed to meet expectations.

In this context, the BoE is expected to keep its Bank Rate on hold at the current 4.75% level on Thursday. The market is expecting between two and three rate cuts next year, a slower pace of monetary easing which is likely to favour the Pound against the Common Currency.

Central banks FAQs

What does a central bank do?

Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.

What does a central bank do when inflation undershoots or overshoots its projected target?

A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.

Who decides on monetary policy and interest rates?

A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.

Is there a president or head of a central bank?

Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.

Author

Guillermo Alcala

FXStreet

Graduated in Communication Sciences at the Universidad del Pais Vasco and Universiteit van Amsterdam, Guillermo has been working as financial news editor and copywriter in diverse Forex-related firms, like FXStreet and Kantox.

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