EUR/GBP rises to near 0.8500, dovish ECB tone caps upside
- EUR/GBP remains under pressure as markets increasingly anticipate further ECB rate cuts, potentially as soon as June.
- The European Commission has initiated a public consultation proposing potential countermeasures to US-imposed tariffs.
- The Pound Sterling strengthens after US President Donald Trump announces a new US-UK trade agreement.
EUR/GBP halts its four-day losing streak, trading around 0.8490 during early European hours on Friday. However, the pair’s upside may be capped as the Euro (EUR) remains under pressure amid growing expectations of further interest rate cuts by the European Central Bank (ECB), possibly as early as the June meeting. While ECB officials remain optimistic that inflation will sustainably return to the 2% target by year-end, concerns over the Eurozone’s economic outlook persist.
In trade developments, the European Commission has launched a public consultation outlining potential countermeasures in response to US tariffs. The proposal targets up to €95 billion worth of US imports should trade negotiations fail, just shy of the €100 billion estimate reported by Bloomberg on Tuesday.
European Trade Commissioner Maros Sefcovic stated on Wednesday that the Commission would soon announce measures to counterbalance the economic impact of US tariffs. “Tomorrow we will announce the next preparatory steps, both in the area of possible rebalancing measures, and also in areas important for further discussions,” he said. However, Sefcovic emphasized that the EU’s primary focus remains on securing a negotiated agreement with the US, albeit not at any cost.
The EUR/GBP pair may also face pressure as the Pound Sterling (GBP) gains support following US President Donald Trump's announcement of a US-UK trade deal. While the agreement retains the 10% tariffs on British goods, it includes US procurement access and delays decisions on UK market access for US agriculture and beef, pointing to a modest initial scope.
Meanwhile, the Bank of England (BoE) cut its key interest rate by 25 basis points on Thursday, in line with expectations. However, the central bank adopted a more hawkish tone, stating that policy support will be withdrawn gradually and rates will remain restrictive as long as needed to control inflation risks.
In a surprise move, two policymakers voted to keep rates unchanged, signaling a cautious approach. As a result, investors have modestly revised their expectations, now pricing in around 59 basis points of rate cuts by year-end.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
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