EUR/GBP traded in a tight range on Thursday, hovering near 0.8625 and staying a few pips above two-week lows at 0.8620, as markets waited for the European Central Bank’s policy decision. The ECB is broadly expected to raise rates by 25 basis points, the first increase since September 2023, taking the Deposit Facility Rate to 2.25% as it seeks to contain inflationary pressure linked to the energy shock. With the move largely priced in, attention turns to Christine Lagarde’s press conference and any changes to forward guidance, where a lack of commitment to further tightening could keep the Euro on the back foot.
Geopolitical risk remains a headwind for both currencies as the three-month conflict in the Middle East intensifies. The US military launched a fresh round of attacks on Iran, while Tehran targeted US assets in response, and Donald Trump warned of further strikes if Iran does not sign a deal. In the UK, focus shifts to Friday’s data, with April GDP expected to contract by 0.1% after 0.3% growth in March. Manufacturing Production is forecast to fall 0.2%, while Industrial Production is seen rising 0.1% after a 0.2% decline.
ECB Policy Moves and Eurozone Sentiment
We see the EUR/GBP pair trading in a tight range near the 0.8600 level, showing signs of nervous consolidation. The market is currently digesting last week’s interest rate cut by the European Central Bank, the first since 2019, which brought the deposit facility rate to 3.75%. This action has shifted all focus to the Bank of England’s upcoming policy decisions and created a tense calm.
With the ECB’s rate cut already priced into the market, we are now focused on forward guidance from President Christine Lagarde. Her commentary on persistent services inflation will be crucial for pricing future rate movements. Any signal that the ECB may pause its cutting cycle would be interpreted as hawkish, which could provide temporary support for the Euro.
Broader market sentiment remains fragile, limiting aggressive positions in either the Euro or the Pound. The ongoing conflict in Ukraine continues to weigh on European economic sentiment, while disruptions in the Red Sea pose a risk to supply chains and inflation. We believe these geopolitical factors will continue to support demand for options strategies that profit from increased volatility.
Outlook for the Pound and UK Data
In the UK, we are closely watching the upcoming inflation and wage growth data. While the latest Consumer Price Index (CPI) showed inflation falling to 2.3%, close to the 2% target, strong wage growth is a key reason the Bank of England has hesitated to cut its own 5.25% rate. A hot inflation or wage report would likely push expectations for a UK rate cut further into the autumn, providing strength to the Pound against the Euro.
