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Euro hesitates near lows against the British Pound with the ECB in focus

  • EUR/GBP trades flat around 0.8625, a few pips above two-week lows at 0.8620.
  • The ECB is widely expected to hike interest rates by 25 basis points amid rapidly rising inflation.
  • In the UK, GDP and Manufacturing Production data, due on Friday, is likely to set the direction of GBP crosses.

The Euro (EUR) is going through a nervous consolidation against the  British Pound (GBP) on Thursday, with price action hovering around 0.8625, a few pips above two-week lows at 0.8620. The pair remains on the defensive, awaiting the outcome of the European Central Bank’s (ECB) monetary policy decision, while escalating tensions in the Middle East keep risk appetite subdued.

The ECB is widely expected to hike rates by a quarter of a percentage point for the first time since September 2023, bringing its benchmark Rate on the Deposit Facility to 2.25%, to stem inflationary pressures from the energy shock.

With the rate hike already priced in, investors are likely to focus on ECB President Christine Lagarde’s press conference for further insight about the bank’s forward guidance. In that sense, failure to commit to further monetary tightening might be considered a too-dovish message, and increase bearish pressure on the Euro.

Meanwhile, news from the Middle East remains grim, keeping demand for both the Euro and the GBP limited. The US military has launched a new round of attacks on Iran, and Tehran responded by targeting US assets in the region. US President Donald Trump threatened earlier on Thursday with more attacks if Iran fails to sign a deal, altogether dampening hopes of an upcoming end to the three-month conflict. 

In the UK, all eyes are on the monthly Gross Domestic Product (GDP) and Industrial and Manufacturing Production data, due on Friday. Economic growth is expected to have contracted at a 0.1% pace in April, following a 0.3% growth in March. Manufacturing Production is seen dropping 0.2%, while Industrial Production is expected to have bounced up by 0.1% following a 0.2% decline in March.

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

Guillermo Alcala

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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