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EUR/GBP loses momentum below 0.8450 ahead of Eurozone, UK CPI data

  • EUR/GBP is trading lighter around 0.8435 in the first European session on Monday.
  • The ECB cut interest rates 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.

EUR/GBP drops to near 0.8435 in the first European session on Monday. The euro’s (EUR) rise could be limited after the European Central Bank’s (ECB) interest rate decision last week. Attention will turn to August UK and eurozone inflation data on Wednesday ahead of the Bank of England’s (BoE) interest rate decision.

The ECB reduced an interest rate cut by a quarter of a point last week, marking its second deposit rate cut this year. Moreover, the central bank revised its growth forecast for 2024 to 0.8% from a previous projection of 0.9%, due to the “weaker contribution of domestic demand over the next few quarters”. The ECB rate cut and lower growth forecasts could undermine the common currency in the near term.

ECB Governing Council member Gabriel Makhlouf noted on Friday that the central bank continues to operate in a “highly uncertain environment” and will remain data-dependent when it comes to making future monetary policy decisions.

As for GBP, the BoE rate decision will be the highlight on Thursday, with expectations that the policy rate will be left unchanged at 5.0% in the September meeting. Ahead of the key UK event, UK Consumer Price Index (CPI) inflation data will be released, which is expected to show a 2.2% increase from last year in August. The weaker reading could prompt the BoE to consider another rate cut in November.

ECB FAQs

The European Central Bank (ECB) in Frankfurt, Germany is the reserve bank for the euro area. The ECB sets interest rates and manages monetary policy for the region. The ECB’s main mandate is to maintain price stability, which means keeping inflation at around 2%. Its main tool to achieve this is by raising or lowering interest rates. Relatively high interest rates will usually lead to 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 taken by the heads of national banks in the euro area and six permanent members, including ECB President Christine Lagarde.

In extreme situations, the European Central Bank can implement 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 leads to 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, and during the covid pandemic.

Quantitative tightening (QT) is the inverse of QE. It is undertaken after QE when an 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 in the bonds it already owns . It is usually positive (or bullish) for the euro.

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