EUR/GBP Slips as Traders Brace for ECB, BoE Decisions

Key Moments

Cross Weakens After Recent Gains

EUR/GBP moved lower to roughly 0.8635 in early European dealings on Wednesday, ending a four-session winning run. Trading conditions appeared cautious as participants waited for interest rate decisions from both the European Central Bank (ECB) and the Bank of England (BoE), which are scheduled for Thursday.

Investors remained in a “wait-and-see” mode ahead of these key policy announcements, with the outcome and subsequent communications seen as potential catalysts for fresh direction in the currency pair.

ECB Policy Outlook and Market Pricing

The ECB is widely anticipated to leave its benchmark deposit rate unchanged at 2.0%. Market participants are expected to scrutinize the post-meeting press conference for any signals about the future policy path. Any hawkish tone from ECB officials could provide short-term support for the Euro (EUR) against the Pound Sterling (GBP).

Interest rate futures are currently fully pricing in a rate increase by the end of July, along with roughly a 55% probability of a second hike by the end of December. However, economists surveyed by Reuters between March 9 and March 13 have maintained their long-standing expectation that rates will remain steady.

BoE Expectations and UK Macro Focus

In the United Kingdom, the BoE is expected to keep its key interest rate unchanged at 3.75% at its March meeting on Thursday. Analysts noted that the ultimate effect of the energy price shock on inflation and inflation expectations – and consequently on the BoE’s policy stance – will depend on both the magnitude and persistence of that shock.

Bank of America economists have revised their outlook and now see two Bank Rate cuts in June and September, pushing back their earlier forecast that anticipated cuts in March and June.

UK Labor Data and Implications for GBP

UK labor market figures are also set to draw attention on Thursday. The ILO Unemployment Rate is forecast to edge up to 5.3% in January from 5.2% in December. Evidence of resilience in the UK jobs market could offer support to the Pound Sterling against the Euro in the near term.

ECB: Role, QE, and QT

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’s 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.