EUR/GBP edges lower to 0.8730; lacks follow-through amid BoE-ECB policy divergence
- EUR/GBP edges lower on Monday and snaps a three-day winning streak to a one-month high.
- The divergent BoE-ECB expectations act as a tailwind for the currency pair and help limit losses.
- Traders also seem reluctant to place aggressive directional bets ahead of the ECB on Thursday.
The EUR/GBP cross kicks off the new week on a softer note and moves further away from a nearly one-month high, around the 0.8745-0.8750 supply zone, touched on Friday. Spot prices currently trade around the 0.8730-0.8725 region and, for now, seem to have snapped a three-day winning streak, though any meaningful downside seems elusive.
Expectations for further easing by the Bank of England (BoE), along with worries about the UK’s fiscal outlook ahead of the Autumn budget in November, might continue to undermine the British Pound (GBP) and support the EUR/GBP cross. Traders ramped up their bets for a 25-basis-point (bps) rate reduction by the BoE in November after data released last week showed that the consumer inflation unexpectedly held steady in September. This comes on top of signs of cooling in the UK jobs market and backs the case for more BoE rate cuts by the year-end.
The outlook marks a significant divergence in comparison to the growing acceptance that the European Central Bank (ECB) has finished cutting interest rates. Moreover, rate futures are narrowly pricing a 25 bps rate cut by end-2026, which might contribute to the shared currency's outperformance against its British counterpart and continue to offer some support to the EUR/GBP cross. However, political uncertainty in France should hold back traders from placing aggressive bullish bets around the Euro (EUR) and capping the currency pair.
In fact, France’s Socialist Party leader, Olivier Faure, has threatened to topple Prime Minister Sébastien Lecornu’s government by Monday if the party’s budget demands are not met. Furthermore, Moody's Ratings changed France's outlook to negative, while reaffirming aa3 ratings as domestic political instability risks hampering its ability to address key policy challenges like the elevated fiscal deficit, rising debt burden. Traders also seem reluctant and opt to wait for the ECB decision on Thursday before placing directional bets around the EUR/GBP cross.
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.