EUR/GBP Trading Update

As of Tuesday, the EUR/GBP exchange rate is holding steady, trading at approximately 0.8578. This comes as buyers haven’t managed to push the price above 0.8660, a previous support level that is now acting as resistance.

The market is somewhat cautious, with traders considering ongoing risks in the Middle East and how these might affect monetary policy in both the Eurozone and the UK. Crude oil prices remain high, primarily due to stalled negotiations between the United States and Iran, which aim to resolve the conflict and reopen shipping routes through the Strait of Hormuz. This situation keeps inflation risks elevated, prompting policymakers to maintain restrictive interest rates for an extended period.

This year, the European Central Bank (ECB) has increased interest rates twice, raising the deposit facility rate to 2.50%. In contrast, the Bank of England (BoE) has kept its rate steady at 3.75% for six consecutive meetings. While markets anticipate that both central banks might raise borrowing costs soon, policymakers seem to be treading carefully, especially since rising energy prices pose significant inflation risks for both regions, complicating efforts to manage inflation without hindering economic growth.

On Tuesday, ECB official Peter Kazimir commented that the recent rate hike was “unavoidable” and emphasized the crucial role of energy prices in shaping future policy. Another ECB official, José Luis Escrivá, mentioned that interest rates are “still not in restrictive territory” but expressed concern over the upward trend in long-term bond yields, suggesting it might put additional pressure on interest rates.

ECB President Christine Lagarde highlighted, earlier this week, that there are still risks for inflation on the upside, alongside potential downside risks for growth. She pointed out that inflation seems set to rise, yet there are no clear indicators of it becoming ingrained. In her view, a measured response from the ECB is necessary to keep inflation under control.

After the BoE’s decision on September 17, Governor Andrew Bailey warned that should the Middle East conflict persist for a longer duration and the risk of inflationary effects increase, then a policy tightening might be necessary.

Looking ahead, there’s a busy week of central bank communications and economic data on the horizon. Traders are particularly focused on the UK’s second-quarter Gross Domestic Product (GDP) figures, along with Germany’s preliminary inflation rates and Retail Sales on Wednesday, before the Eurozone’s preliminary inflation report on Friday.