EUR/GBP Slides Amid ECB Rate Cut Speculation
- EUR/GBP slides as a growing number of analysts make calls that the ECB will cut interest rates at their meeting next week.
- Lower borrowing costs are negative for the Euro because they reduce capital inflows.
- Sterling stands firm following the release of robust macroeconomic data.
The EUR/GBP pair edged lower on Friday as traders sold the Euro (EUR) in response to increasing speculation that the European Central Bank (ECB) will implement more aggressive interest rate cuts in the future. Lower interest rates tend to have a negative effect on a currency as they reduce foreign capital inflows. Recent price action has seen EUR/GBP steadily retreat by almost three quarters of a pence from the October 3 high of 0.8434 to trade in the 0.8360s at the end of the trading week.
Factors Driving the EUR/GBP Movement
The EUR/GBP pair is facing pressure from sellers as traders anticipate another rate cut by the ECB at its upcoming meeting on October 17. Several key factors are contributing to this sentiment:
- Inflation has fallen more rapidly than expected, dropping to 1.8% in September, below the ECB’s 2.0% target.
- Economic growth is slowing, prompting expectations for a 0.25% cut to the main refinancing rate, currently at 3.65%.
Leading financial institutions such as Deutsche Bank Securities and Nordea Bank are forecasting a 25 bps cut by the ECB in October, signaling a potential shift towards a faster easing cycle.
Sterling’s Resilience and BoE Outlook
On the other hand, the Pound Sterling (GBP) saw mild gains on Friday following the release of positive macroeconomic data:
- GDP growth in August met expectations, rising by 0.2% after a flat reading in July.
- Industrial and Manufacturing Production figures for August surpassed previous and expected values, indicating a strong performance in the UK economy.
The robust economic data suggests that the Bank of England (BoE) may not rush to cut interest rates at its next meeting, giving the Pound an edge over currencies of countries committed to lowering borrowing costs.
BoE Policy and Market Impact
The Pound experienced a sharp sell-off on October 3 following comments from BoE Governor Andrew Bailey hinting at potential rate cuts. However, the currency stabilized after BoE’s Chief Economist Huw Pill expressed a more cautious stance. The upcoming BoE policy meeting on November 7 carries a balanced chance of a 25 bps rate cut.
Overall, the contrasting monetary policies of the ECB and BoE are driving the EUR/GBP exchange rate, with traders closely monitoring central bank decisions and economic data releases for further insights into currency movements.