EUR/GBP holds position above 0.8500 ahead of PMI data from Eurozone, UK

EUR/GBP maintains its position as the Euro remains stronger ahead of PMI data from the Eurozone and Germany.
ECB is widely expected to deliver a 25 basis point rate cut in June.
The Pound Sterling finds support, as the UK is seen as relatively insulated from the impact of US tariffs.

Akhtar Faruqui FXStreet

EUR/GBP retraces its recent losses from the previous session, trading around 0.8510 during the early European hours on Tuesday. The pair is supported by a stronger Euro (EUR), which is gaining ahead of key Purchasing Managers’ Index (PMI) data releases from the Eurozone and Germany later in the day. Market focus will also turn to the UK’s S&P Global/CIPS PMI figures.

The Euro's strength follows robust Eurozone inflation data released last Friday. However, the hotter-than-expected inflation figures are unlikely to significantly alter the European Central Bank’s (ECB) monetary policy stance. ECB officials remain focused on slowing economic momentum and are downplaying inflation risks, despite new tariffs announced by US President Donald Trump adding external pressure. Markets continue to expect a 25 basis point rate cut at the ECB’s June meeting, with policymakers broadly confident inflation will return to the 2% target this year.

On the other hand, the Pound Sterling (GBP) is also finding support, as the United Kingdom (UK) is seen as relatively insulated from the impact of US tariffs, unlike China or the EU, given the US posted a $12 billion goods surplus with Britain in 2024. Nevertheless, the GBP faces downside risks amid rising expectations that the Bank of England (BoE) will cut interest rates by 25 basis points to 4.25% at its policy meeting on Thursday.

Investors are also eyeing the BoE’s updated economic forecasts, which may provide clues on the likelihood of additional rate cuts. Some analysts anticipate the central bank could adopt a more dovish tone in response to escalating global risks, particularly those tied to President Trump's tariffs and the potential for a broader economic slowdown.

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

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.

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