Euro gains against British Pound after mixed UK inflation report,ECB decision looms
- EUR/GBP edges higher as softer headline inflation and weak labour-market data weigh on the British Pound.
- UK fiscal concerns add pressure on Sterling as investors assess Prime Minister Andy Burnham’s spending plans.
- The ECB is expected to hold rates on Thursday, with markets pricing another hike in September.
EUR/GBP edges higher on Wednesday as a mixed UK inflation report weighs modestly on the British Pound (GBP). At the time of writing, the cross trades around 0.8533, extending its recovery after falling to its lowest level in more than a year earlier this month.
The Consumer Price Index (CPI) rose 0.1% in June, matching expectations but slowing from May’s 0.2% increase. Annual inflation eased to 2.6% from 2.8%, below the 2.7% forecast. However, core inflation held at 2.6%, above expectations of 2.5%.
The data follows Tuesday’s UK labour report, which pointed to cooling wage pressures and weak hiring. Taken together, the data make a near-term Bank of England (BoE) rate hike less likely. However, inflation risks remain elevated as renewed US-Iran fighting disrupts Oil flows through the Strait of Hormuz and pushes energy prices higher.
According to BBH, “The swaps curve prices in a full 25bps BoE rate hike to 4.00% in November and a total of 75bps of tightening in the next twelve months.” However, analysts cautioned that “restrictive monetary policy when the UK economy is operating well below potential raises the likelihood of a downward adjustment to BoE rate expectations against GBP.”
Meanwhile, concerns over the UK’s fiscal outlook also weigh on the Pound as investors assess how new Prime Minister Andy Burnham will fund his spending plans.
Across the Channel, the European Central Bank’s (ECB) monetary policy decision on Thursday is the main risk event for the Euro (EUR). The central bank is widely expected to leave the Deposit Facility Rate unchanged at 2.25% after raising it by 25 basis points in June. Markets expect another ECB rate hike in September as higher Energy prices keep inflation risks in focus.
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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