EUR/GBP hovers around 0.8600 psychological level, focus on ECB policy decision

EUR/GBP trades higher near 0.8600 during the Asian session on Thursday, embracing before the interest rate decision by the European Central Bank (ECB) scheduled to be released later in the day.

ECB could increase the interest rates by 25 basis points (bps) to 4.0% as its policymakers maintained the possibility of a September hike when they raised interest rates in July.

However, there are arguments in favor of hitting the pause button on further rate hikes. Some believe that the combined impact of previous tightening measures may be significant enough to subdue underlying inflationary pressures.

According to a Bloomberg survey of 49 analysts, 26 anticipate no change in rates, while 23 expect a quarter bps hike. In a Reuters poll, a slight majority of experts believe that the ECB will refrain from raising rates further. These differing views highlight the uncertainty and varied expectations surrounding the ECB's monetary policy decision.

On the other side, recent data indicates that the UK's unemployment rate increased more than expected, but the Bank of England (BoE) remains concerned about the sustainability of wage growth and its potential impact on persistent inflation.

In the three months leading up to July, the UK's unemployment rate rose from 4.2% to 4.3%. Additionally, the Employment Change for July showed a decline of 207,000, a more significant drop than the previous reading of 66,000 and worse than the anticipated decrease of 185,000.

On the positive side, Average Earnings Including Bonus for the three months to July increased by 8.5%, up from 8.2% in the previous period. Excluding bonuses, the figure remained at 7.8%, in line with expectations.

BoE has taken a more cautious approach recently, as indicated by BoE Governor Andrew Bailey's statement that the central bank is nearing the peak of its rate hike cycle. Despite ongoing inflation concerns, the BoE must tread carefully, as overly aggressive interest rate hikes could pose risks to the stability of the British economy.

Balancing the need to address inflationary pressures while ensuring sustainable economic growth is a challenging task for the central bank.