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17 Apr 2025
EUR/GBP holds below 0.8600 ahead of ECB rate decision
- EUR/GBP weakens to near 0.8590 in Thursday’s early European session, losing 0.44% on the day.
- The ECB is expected to cut rates on Thursday amid tariff-induced recession concerns.
- UK inflation eased to 2.6% YoY in March, building the case for a BoE rate cut.
The EUR/GBP cross attracts some sellers to around 0.8590 during the early European trading hours on Thursday. The Euro (EUR) weakens against the Pound Sterling (GBP) as the European Central Bank (ECB) is anticipated to deliver a 25 basis points (bps) rate cut later in the session.
The ECB is widely expected to cut its key interest rate by 25 bps to 2.25% at its April meeting on Thursday, marking a sixth straight reduction, as inflation cools and tariff risks rise. Peter Vanden Houte, chief economist at ING, believes that the ECB is likely to cut short rates again with 25 basis points. Meanwhile, Hadrien Camatte, senior economist at Natixis, noted the ECB may cut all three key interest rates at its meeting Thursday, adding that another 25 bps reduction could follow in June.
Data released by National Statistics on Wednesday showed that UK inflation fell more than expected in March, paving the way for the Bank of England (BoE) to cut interest rates next month to 4.25%. The UK CPI rose 2.6% YoY in March, an easing from the 2.8% increase in February. It was the weakest inflation since December 2024 and below the market consensus of 2.7%.
Financial markets are now betting on an interest rate cut from the BoE meeting at its May meeting, estimating an 86% chance, according to the LSEG data. Rob Wood, chief UK economist at Pantheon Macroeconomics, sees room for interest rate reductions in May, June and November, even though US tariffs have clouded the economic outlook.
ECB FAQs
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 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.