The EUR/GBP pair edged lower on Friday as traders sold the Euro in anticipation of more aggressive interest rate cuts from the European Central Bank (ECB). Lower interest rates typically reduce foreign capital inflows, putting downward pressure on a currency. Recent price movements have seen EUR/GBP retreat nearly three-quarters of a penny from its October 3 high of 0.8434, closing the trading week in the 0.8360s.
ECB Rate Cut Anticipation
EUR/GBP faces mounting pressure from sellers as markets brace for a potential 25 basis point (0.25%) rate cut at the ECB’s upcoming meeting on October 17. Since the last meeting, inflation has fallen more quickly than expected, with the headline rate dropping to 1.8% in September, marking the first time it has fallen below the ECB’s 2.0% target in over three years. Concurrently, economic growth is slowing, prompting the Governing Council to consider further easing to support lending within the economy.
Mark Wall, Director at Deutsche Bank Securities, stated, “We expect the ECB to cut rates by 25 basis points again on 17 October. Growth is even weaker than the ECB’s downwardly revised September forecasts, inflation is returning to target sooner than the end-2025 staff forecast, and there is little apparent opposition within the Governing Council to a further easing in October for risk management purposes.” Wall emphasized that another rate cut would signify a shift towards a more aggressive easing cycle.
Nordea Bank also predicts a 25 basis point cut from the ECB in October. Jan von Gerich, Chief Analyst at Nordea, noted, “The ECB is very likely to accelerate the pace of its rate cuts by cutting 25 basis points again at the October meeting. However, the central bank may not be ready to signal that it intends to cut rates at every meeting going forward.”
Positive Data Bolsters Pound Sterling
In contrast, the Pound Sterling (GBP) experienced mild gains on Friday following the release of positive economic data. The UK’s Gross Domestic Product (GDP) growth for August rose by 0.2%, aligning with expectations and surpassing July’s flat 0.0% figure. This data contributed to a dip in EUR/GBP as the Pound gained strength.
UK Industrial Production rose by 0.5% in August, exceeding both the (revised-up) 0.7% decline of July and the expected 0.2% increase. Manufacturing Production also outperformed expectations, rising by 1.1%, compared to previous and anticipated figures.
This robust economic performance suggests that the UK economy is faring well despite relatively high interest rates of 5.0%. As a result, analysts believe the Bank of England (BoE) is unlikely to rush into cutting interest rates at its next meeting, giving the Pound an advantage over its peers, many of which are poised to reduce borrowing costs.
The Pound had previously sold off sharply on October 3 after BoE Governor Andrew Bailey indicated the possibility of a more “activist” and “aggressive” approach to interest rate cuts. However, Sterling stabilized the following day after more cautious remarks from BoE Chief Economist Huw Pill. The BoE’s next policy meeting is scheduled for November 7, with a balanced chance of a 25 basis point cut.
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