EUR/GBP hovers near 0.8500 as soft Eurozone inflation, dovish BoE shape outlook
- EUR/GBP may depreciate due to weaker-than-expected preliminary April HICP data from the Eurozone’s largest economies.
- Markets have largely priced in a 25 basis point rate cut by the ECB at its June meeting.
- The Pound Sterling weakens as markets are now anticipating a BoE 25 basis point rate cut in May.
EUR/GBP holds ground for a second consecutive session, trading around the 0.8500 mark during the Asian session on Thursday. However, the upside of the EUR/GBP cross may be capped as the Euro (EUR) trades cautiously following weaker-than-expected preliminary April Harmonized Index of Consumer Prices (HICP) data from Germany and France, along with steady readings from Italy and Spain.
These figures suggest moderate inflationary pressures across the Eurozone’s largest economies, reinforcing market expectations for further monetary easing by the European Central Bank (ECB). A 25 basis point rate cut is now almost fully priced in for the ECB’s June meeting, as policymakers anticipate further declines in inflation and economic activity amid the impact of new US tariffs on its trading partners.
Despite potential headwinds for the Euro, the EUR/GBP cross may find support from a weakening Pound Sterling (GBP) against its peers, as sentiment turns increasingly dovish toward the Bank of England (BoE). Markets are now anticipating a 25 basis point rate cut at the BoE's upcoming policy decision on May 8. These expectations have intensified on concerns that the US’s new tariff measures could reduce global inflation and weigh on UK economic growth.
BoE policymaker Megan Greene added to the dovish tone, stating in a speech at the Atlantic Council on Friday that the potential trade conflict would have a "net disinflationary" effect on the UK economy. Greene also flagged labor market risks, citing the recent increase in employers’ national insurance contributions from 13.8% to 15%, which took effect this month.
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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