EUR/GBP flat lines above 0.8650 as markets await ECB, BoE rate decisions
- EUR/GBP trades flat near 0.8665 in Wednesday’s early European session.
- ECB is widely expected to hold the key interest rates steady at its upcoming meeting.
- BoE is likely to keep interest rates unchanged at 3.75% at its April policy meeting.
The EUR/GBP cross flat lines around 0.8665 during the early European trading hours on Wednesday. Traders turn to a wait-and-see mode ahead of key interest rate decisions from both the European Central Bank (ECB) and the Bank of England (BoE) on Thursday.
The ECB is expected to keep its key interest rates unchanged at its upcoming policy meeting on Thursday due to high uncertainty. Nonetheless, rising inflation, driven by energy price volatility from the Iran war, has raised the expectation of a rate hike in June.
Goldman Sachs analysts see the ECB delivering two 25 basis point (bps) rate hikes in the months ahead. The first being in June, with the next in September, to bring the deposit rate back to 2.50%. Traders will take more cues from the ECB President Christine Lagarde's press conference after the meeting for clues about the outlook for rates.
On the UK’s front, the Bank of England (BoE) is expected to hold interest rates steady at 3.75% in its upcoming decision on Thursday as policymakers buy time to assess the risks stemming from the energy crunch.
BoE governor Andrew Bailey stated in the last meeting that, given the UK’s weak labour market and a lack of corporate pricing power, there was no immediate need to change policy. However, a UK economist at JPMorgan pointed to strong business activity readings and expansion in Gross Domestic Product (GDP) in February as underscoring the inflation risks. “We expect the BoE to create space for a potential near-term hike, with incoming data determining whether and when it will act,” he said.
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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