EUR/GBP eases despite stronger Eurozone inflation data
- EUR/GBP trades slightly lower as investors reassess central bank policy outlook.
- Rising Oil prices linked to the US-Iran conflict fuel fresh global inflation concerns.
- Stronger-than-expected Eurozone inflation data offers limited support to the Euro.
The Euro (EUR) trades under mild pressure against the British Pound (GBP) on Tuesday as traders reassess the monetary policy outlook for major central banks amid inflation concerns tied to higher Oil prices driven by the US-Iran conflict. EUR/GBP is trading near 0.8710 at the time of writing, retreating from the daily high around 0.8739.
Markets are increasingly pricing in the risk of prolonged supply disruptions through the Strait of Hormuz, a key shipping route that accounts for nearly 20% of global Oil flows. Concerns escalated after an adviser to Iran’s Islamic Revolutionary Guard Corps said on Monday that Iran “will set fire to any ship attempting to pass through the Strait.”
In reaction, traders have scaled back expectations for a Bank of England (BoE) interest rate cut at the March meeting, with markets now pricing less than a 50% probability, Bloomberg reported on Monday.
The repricing is lending modest support to the Pound. However, Sterling lacks strong follow-through buying as political uncertainty in the United Kingdom persists amid renewed scrutiny over Prime Minister Keir Starmer’s leadership.
Meanwhile, stronger-than-expected inflation data offered little support to the Euro. Preliminary data released by Eurostat showed that inflation in the Eurozone picked up in February. The Core Harmonized Index of Consumer Prices (HICP), which excludes volatile food and energy prices, rose 0.8% MoM, rebounding from a 1.1% decline in January.
On an annual basis, core inflation accelerated to 2.4%, beating market expectations of 2.2%. Meanwhile, the headline HICP increased 0.7% MoM after falling 0.6% in the previous month, while the annual rate rose to 1.9%, above the 1.7% forecast.
European Central Bank (ECB) officials have also flagged the risks stemming from the US–Iran conflict. ECB policymaker Yannis Stournaras said the central bank is closely monitoring developments, adding that there is “no rush to change policy,” while warning that inflation could face upward pressure if the conflict persists.
Separately, ECB policymaker Francois Villeroy de Galhau cautioned against speculating on the next policy move, saying it would be “a mistake to predict rate moves in a hurry.”
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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