The EUR/GBP cross traded flat around 0.8420 in early European hours on Thursday as market participants adopted a cautious stance ahead of the European Central Bank’s (ECB) closely watched interest rate announcement.
Expectations of a rate cut intensified following Tuesday’s release of Eurozone inflation data, which showed a further decline in the Harmonized Index of Consumer Prices (HICP). Markets have already priced in a near-certain 25 basis point (bps) reduction in the ECB’s deposit facility rate, set to bring it to 2.0% — its lowest since January 2023, according to LSEG data.
A dovish move by the ECB could weigh on the euro relative to the British pound. According to Jack Allen-Reynolds, Deputy Chief Eurozone Economist at Capital Economics, the central bank is expected to follow up with two more rate cuts — one each in September and December. The accompanying press conference by ECB President Christine Lagarde will also be closely scrutinized for insights into the bank’s inflation outlook and forward guidance.
On the other side of the cross, the British Pound is being supported by a relatively hawkish outlook for the Bank of England (BoE). Futures markets are currently pricing in a single 25 bps rate cut by the end of 2025, with a roughly 50% probability of a second, more modest reduction. This contrasts with the more aggressive easing path expected from the ECB and lends support to GBP strength.
Adding a layer of complexity, the UK has temporarily escaped inclusion in US President Donald Trump’s recent executive order that doubles tariffs on steel and aluminium imports from 25% to 50%. Although the UK is not directly impacted for now, uncertainty surrounding future trade policy developments continues to hover over the Pound.
In the immediate term, traders are likely to stay on the sidelines until the ECB’s policy decision and press conference later today, which could set the tone for the EUR/GBP pair heading into the second half of the week.
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