EUR/GBP gathers strength to above 0.8650, all eyes on ECB rate decision
- EUR/GBP strengthens to around 0.8670 in Thursday’s early European session.
- The US and EU close in on a 15% tariff deal.
- ECB is expected to hold key interest rates as the tariff deadline looms.
The EUR/GBP cross trades in positive territory near 0.8670 during the early European session on Thursday, bolstered by optimism surrounding the European Union (EU) and the United States (US) trade deal. The European Central Bank (ECB) interest rate decision will take center stage later on Thursday.
The Financial Times reported late Wednesday that the EU and US are closing in on a trade deal that would impose 15% tariffs on EU imports. The bloc could agree to the so-called reciprocal levies to avoid US President Donald Trump’s threat to raise them to 30% from August 1. Hope for the EU-US trade agreement provides some support to the Euro (EUR) against the Pound Sterling (GBP).
The ECB is set to keep interest rates on hold at its July meeting on Thursday, pausing after seven consecutive cuts amid the uncertainty from US tariffs. "The ECB is widely expected to keep policy on hold this week, as uncertainty prevails with no trade deal yet on the horizon between the U.S. and EU," said Christophe Boucher, chief investment officer at ABN AMRO Investment Solutions. Analysts expect one more ECB rate cut by the end of the year, most likely in December, according to Reuters.
On the GBP’s front, traders are increasingly confident that the Bank of England (BoE) will cut interest rates at its August monetary policy meeting. This, in turn, could drag the GBP lower against the EUR. Meanwhile, traders will keep an eye on the release of preliminary UK S&P Global Purchasing Managers’ Index (PMI) data of July on Thursday. In case of a stronger-than-expected outcome, this could help limit the GBP’s losses in the near term.
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.
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