- EUR/GBP edges higher to around 0.8370 in Thursday’s early European session.
- The ECB will likely cut interest rates on Wednesday, keeping the door open to further easing.
- The markets have priced in almost three quarter-point rate cuts by the BoE in 2025.
The EUR/GBP cross rebounds to near 0.8370, snapping the five-day losing streak during the early European trading hours on Thursday. However, the upside of the cross might be limited amid the dovish stance of the European Central Bank (ECB). The ECB interest rate decision and the preliminary reading of the Eurozone Gross Domestic Product (GDP) for the fourth quarter will be the highlights later on Thursday.
The ECB is expected to cut its key interest rate by another 25 basis points (bps) to 2.75% at its January meeting on Thursday and is likely to keep open the door to further policy easing amid an uncertain economic outlook and worries about persistent inflation. This, in turn, might weigh on the Euro (EUR) against the Pound Sterling (GBP). The ECB lowered borrowing costs four times in 2024, and up to four moves are anticipated this year.
On the GBP’s front, financial markets on Wednesday have priced in almost three quarter-point rate cuts by the Bank of England (BoE) this year, compared with fewer than two reductions in early January. The UK economy has stagnated and inflation eased last month, boosting the bets on BoE rate cuts. Economists polled by Reuters expect the BoE to cut its benchmark rate to 4.50% from 4.75% next week. “Although a dovish statement from the BoE can be expected to keep the pound on the back foot in the near term, it would also provide comfort for investors and the business community,” said Jane Foley, senior FX strategist at Rabobank.
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.