- EUR/GBP strengthens near 0.8340 in the European session on Tuesday.
- The ECB’s Wunsch said it was premature to discuss the December policy decision.
- According to a Reuters poll, the BoE is likely to cut its rate by a quarter point at the November meeting, to 4.75%.
The EUR/GBP cross is trading in positive territory around 0.8340 on Tuesday during the European session. Comments from European Central Bank (ECB) policymaker Pierre Wunsch boost the Euro (EUR) against the British Pound (GBP). Investors are awaiting preliminary third-quarter gross domestic product (GDP) data from Germany and the Eurozone, due out on Wednesday.
ECB officials are divided over the need for a big reduction. On Monday, ECB policymaker and Belgian central bank chief Pierre Wunsch said there is no urgency for the central bank to cut interest rates faster and that it could even live with a small one. Less moderated comments provide some support for the common currency. Meanwhile, ECB Vice President Luis de Guindos said on Monday that the central bank has made significant progress in reducing inflation but cannot yet declare victory.
However, money markets continue to value the chances of ECB rate cuts by half a percentage point at the December meeting at almost 50%. Wednesday’s GDP figures could offer some clues about the health of the German and Eurozone economies. A weaker than expected result could increase the likelihood of ECB rate cuts in December and could drag the EUR lower.
On the other hand, the expectation that the Bank of England’s (BoE) rate cut cycle could be slower than in the Eurozone could help limit the GBP’s losses. According to a Reuters poll, economists expect the BoE to cut its benchmark rate by a quarter point on Nov. 7, to 4.75%, but a nearly two-thirds majority anticipate no move in December.
The ECB FAQs
The European Central Bank (ECB), headquartered in Frankfurt (Germany), is the reserve bank of the euro zone. The ECB sets interest rates and manages the region’s monetary policy.
The ECB’s main mandate is to maintain price stability, which means keeping inflation at around 2%. Its main tool to achieve this is to raise or lower interest rates. Relatively high interest rates usually translate into a stronger Euro, and vice versa.
The Governing Council of the ECB takes monetary policy decisions at meetings held eight times a year. Decisions are made 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 launch 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 a simple lowering of 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 is carried out after QE, when the economic recovery is underway and inflation begins 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 that are already possesses. 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.
