EUR/GBP trades flat above 0.8300 as traders await the Eurozone inflation data
- EUR/GBP flat lines near 0.8330 in Tuesday’s early European session.
- ECB’s Lagarde signaled the October rate cut as inflation slows.
- Less dovish stance of the BoE might underpin the Pound Sterling in the near term.
The EUR/GBP cross trades on a flat note around 0.8330 on Tuesday during the early European session. Nonetheless, the rising speculation that the European Central Bank (ECB) will lower the interest rates in October might cap the upside for the Euro (EUR) against the Pound Sterling (GBP).
The ECB President Christine Lagarde on Monday hinted about additional rate cuts at its next policy meeting in October amid increasing signs that inflation is beaten and that the economy is struggling. Lagarde added that the central bank is more confident that inflation is going to settle at its target after a series of recent data releases, and will take that into account when it next sets policy. The rising bets on ECB rate reduction are likely to weigh on the shared currency for the time being.
Traders will closely watch the preliminary Eurozone inflation data for fresh impetus. The headline Harmonized Index of Consumer Prices (HICP) is expected to see an increase of 1.9% YoY in September, while the Core HICP is estimated to rise 2.9% YoY in the same period.
On the other hand, the expectation that the easing cycle of the Bank of England (BoE) will be lower than other central banks from Group of Seven (G-7) nations provides some support to the GBP. Investors anticipate the BoE to cut interest rates one more time by 25 bps in the remainder of this year.
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.
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