Euro gains modestly against British Pound after ECB delivers widely expected hike

• The Euro edges higher against the British Pound after the ECB monetary policy announcement.
• The ECB lifts its deposit rate to 2.50% as Middle East tensions keep inflation elevated.
• The BoE is expected to hold next week, although markets see scope for tightening later this year.

EUR/GBP trades with a modest positive bias on Thursday but stays within the narrow range that has been in place for more than a week. The European Central Bank’s (ECB) widely expected interest-rate increase offers only limited support to the Euro (EUR), as the move was already priced in and fails to trigger a breakout. At the time of writing, the cross trades around 0.8595.

The ECB raised its three key interest rates by 25 basis points, marking its second increase this year and lifting the deposit facility rate to 2.50%. The central bank said the war in the Middle East continues to generate inflation pressures and that inflation is likely to stay well above its 2% target for an extended period. Updated projections show headline inflation averaging 3.0% in 2026, 2.5% in 2027 and 2.1% in 2028.

Speaking after the decision, ECB President Christine Lagarde said the Eurozone economy is proving resilient and most measures of underlying inflation are broadly stable. However, she noted that shorter-term inflation expectations are still elevated and that higher energy costs will gradually feed into core and food prices.

Lagarde expects headline inflation to return to the ECB’s target toward the end of 2027. She added that most longer-term inflation expectations remain close to 2%. On the future policy path, Lagarde said the ECB “did not debate the future rate path” and is “not taking a view on which direction to go at the next meeting.”

On the UK side, the Bank of England (BoE) is widely expected to keep its policy rate unchanged at 3.75% on September 17. All 65 economists surveyed by Reuters between September 4 and 8 expect the Monetary Policy Committee to keep rates on hold next week, while 57 expect no change through the end of the year. However, rising Oil prices keep inflation risks tilted to the upside, with traders pricing a possible hike in November.

Strategists at Scotiabank highlight that “the short-term rates market is still pricing very little chance of a policy adjustment at next Thursday’s meeting, but pricing about 17bpts of tightening for November 5th and a cumulative 32bpts by December 17th,” underscoring expectations for a gradual BoE tightening path into year-end. Scotiabank also cautions that “fiscal risk remains elevated as market participants look to the release of the UK budget in late October,” while, on the data side, they “continue to note the absence of any material releases ahead of Friday’s trade and industrial production figures.”