The Euro (EUR) edges lower against the British Pound (GBP) on Monday, with EUR/GBP trimming earlier gains as traders refrain from making aggressive directional bets ahead of the European Central Bank (ECB) and Bank of England (BoE) interest-rate decisions due later this week.
At the time of writing, the cross is trading near 0.8636 after buyers failed to sustain a move above the 0.8650 level.
The upcoming policy meetings on Thursday come at a delicate moment for global markets as the ongoing US-Iran war continues to rattle energy markets and push Oil prices higher. Rising energy costs risk reviving inflation pressure across the Eurozone and the UK, complicating the outlook for both the ECB and the BoE.
The ECB is widely expected to leave its key interest rates unchanged, with the Deposit Facility Rate seen holding at 2.00%, the Main Refinancing Operations Rate at 2.15% and the Marginal Lending Facility at 2.40%. Market focus will instead turn to forward guidance from ECB President Christine Lagarde, as investors increasingly raise bets on potential rate hikes later this year, with a move fully priced in by July.
However, persistently high Oil prices could also weigh on the Eurozone economic growth, given the region’s heavy reliance on imported energy. This could complicate the ECB’s policy outlook. ECB President Christine Lagarde recently said the central bank will ensure the Iran conflict does not trigger the same inflation shock Europe experienced after Russia’s invasion of Ukraine.
Meanwhile, in the UK, the Bank of England is now expected to delay rate cuts. Before the conflict, traders were pricing in nearly an 80% chance of a rate cut at the upcoming meeting, but markets now expect the BoE to keep the Bank Rate unchanged at 3.75%. Investors are also increasingly pricing in the possibility of a rate hike by year-end as lingering inflation risks complicate the BoE’s easing path even as economic growth remains weak.
Looking ahead, traders will also watch upcoming economic data, with Eurozone inflation figures due on Wednesday and the UK labour market report scheduled for Thursday.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
Source: https://www.fxstreet.com/news/eur-gbp-steady-as-traders-await-ecb-and-boe-decisions-amid-inflation-concerns-202603161544
