- EUR/GBP is trading weaker around 0.8435 in early European session on Monday.
- The ECB cut its rate by 25 bps last week, but the bank gave no indication of its next move.
- The BoE is expected to keep interest rates at 5.0% on Thursday.
The EUR/GBP pair is trading lower near 0.8435 during the early European session on Monday. The upside of the Euro (EUR) could be limited following the European Central Bank (ECB) interest rate decision last week. The focus will be on the UK and Eurozone August inflation data on Wednesday, ahead of the Bank of England (BoE) interest rate decision.
The ECB made a quarter-point rate cut last week, marking its second deposit rate reduction this year. In addition, the central bank revised its 2024 growth forecast to 0.8% from a previous projection of 0.9% due to a “weaker contribution from domestic demand in the coming quarters.” The ECB rate cut and lower growth forecasts could weaken the common currency in the near term.
ECB Governing Council member Gabriel Makhlouf said on Friday that the central bank continues to operate in a “highly uncertain environment” and will remain data-dependent in making future monetary policy decisions.
As for GBP, the BoE rate decision will be the highlight on Thursday, with expectations that it will keep its policy rate unchanged at 5.0% at the September meeting. Ahead of the key UK event, the UK Consumer Price Index (CPI) inflation data will be released, which is expected to show a 2.2% year-on-year rise in August. The softer reading could prompt the BoE to consider another cut in November.
ECB FAQs
The European Central Bank (ECB), based in Frankfurt, Germany, is the reserve bank of the Eurozone. The ECB sets interest rates and manages monetary policy in the region.
The ECB’s main mandate is to maintain price stability, which means keeping inflation at around 2%. Its main tool for achieving this is to raise or lower interest rates. Relatively high interest rates usually translate into a stronger Euro, and vice versa.
The ECB’s Governing Council takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of the euro area’s national banks and six permanent members, including ECB President Christine Lagarde.
In extreme situations, the European Central Bank can put in place 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. The result is usually 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 of 2009-11, in 2015 when inflation remained stubbornly low, as well as during the coronavirus pandemic.
Quantitative tightening (QT) is the reverse of QE. It takes place after QE, when the economic recovery is underway and inflation starts to rise. While in QE the European Central Bank (ECB) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds and stops reinvesting the maturing principal of the bonds it already owns. It is usually positive (or bullish) for the Euro.
Source: Fx Street
I am Joshua Winder, a senior-level journalist and editor at World Stock Market. I specialize in covering news related to the stock market and economic trends. With more than 8 years of experience in this field, I have become an expert in financial reporting.
