EUR/GBP holds steady below 0.8450 ahead of ECB rate decision
- EUR/GBP steadies around 0.8420 in Thursday’s early European session.
- The ECB is expected to trim interest rates by 25 bps on Thursday, bringing its deposit facility rate to 2.0%.
- The UK is temporarily spared from Trump's 50% steel tariffs.
The EUR/GBP cross trades on a flat note near 0.8420 during the early European session on Thursday. Traders prefer to wait on the sidelines ahead of the European Central Bank (ECB) interest rate decision later on Thursday.
Tuesday’s Eurozone Harmonized Index of Consumer Prices (HICP) inflation figures increased the chance that the ECB will cut the interest rates in the June meeting. This, in turn, could undermine the shared currency against the GBP. Markets have priced in nearly 99% of a 25 basis points (bps) reduction of the ECB’s deposit facility rate on Thursday, according to LSEG data. The cut would bring the deposit facility rate to 2.0%, its lowest level since January 2023.
Jack Allen-Reynolds, deputy chief Eurozone economist, said the ECB is expected to deliver more rate cuts, forecasting two more 25 bps reductions in September and December. Traders will also closely watch the ECB Press Conference as it might offer some hints about the inflation and economic outlook.
The UK has been temporarily spared from US President Donald Trump's executive order doubling steel and aluminium tariffs from 25% to 50%. However, uncertainty remains over timings and final tariff rates. Any signs of renewed trade tensions between the US and the UK could weigh on the Pound Sterling and create a tailwind for the cross.
Meanwhile, the rising expectation that the Bank of England (BoE) will pause its interest rate reductions could underpin the GBP. The futures markets have priced in borrowing rates to fall by around 38 bps by the end of this year, implying one 25 bps rate cut and a roughly 50% chance of a second reduction, according to a report from Reuters.
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
Lallalit Srijandorn
FXStreet
Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.
