EUR/GBP rebounds as markets reassess ECB, BoE policy amid inflation fears

• EUR/GBP rebounds slightly after five straight days of losses.
• Markets reassess the monetary policy outlook between the ECB and the BoE.
• Fears of an Oil-driven inflation shock complicate interest-rate expectations.

EUR/GBP rebounds on Thursday, with the Euro (EUR) gaining 0.08% against the Pound Sterling (GBP), hovering around 0.8632 at the time of writing. The cross halts five consecutive losing days, as investors reassess the monetary policy outlook for the European Central Bank (ECB) and the Bank of England (BoE) amid rising concerns over an Oil-driven inflation shock linked to the ongoing war between the United States (US) and Iran.

Before the escalation of the US-Iran conflict, markets were increasingly confident that the Bank of England would cut interest rates at next week’s monetary policy meeting. However, the prospect of renewed inflationary pressures from higher Oil prices has clouded the policy outlook, prompting expectations from policymakers to remain cautious and potentially delay rate cuts.

David Miles, a senior figure at the UK Office for Budget Responsibility (OBR), warned that energy shocks could push consumer prices higher. He noted that, if current price trends persist, consumer prices could end the year around 1% higher than previously expected.

Meanwhile, the International Energy Agency (IEA) has agreed to release around 400 million barrels of Oil from member countries’ strategic reserves in an effort to counter soaring global energy prices.

In the Eurozone, expectations of tighter monetary policy are providing some support to the common currency. According to Commerzbank’s rates strategist Hauke Siemßen, recent comments from ECB policymakers, including Peter Kazimir and Isabel Schnabel, have strengthened expectations that the central bank could tighten policy sooner than previously anticipated. Forward markets are now pricing in a first 25-basis-point rate hike by July, although the bank still expects the ECB to leave rates unchanged this year.

ING’s Global Head of Macro, Carsten Brzeski, also argues that rising geopolitical tensions and higher Oil prices could push the ECB to adopt a more hawkish tone in order to keep inflation expectations anchored.

Despite these tightening expectations, investors remain cautious. Persistently high energy prices could weigh more heavily on the Eurozone economy, which is a significant net energy importer, raising stagflation concerns amid an already fragile growth outlook.

Against this backdrop, market participants remain closely focused on geopolitical developments and their potential impact on inflation dynamics and the policy trajectories of major central banks.