EUR/GBP consolidates above 0.8350 ahead of ECB’s Lagarde speech

• EUR/GBP remains flat near 0.8355 in Thursday’s early European session. 
• The BoE policymaker confirmed it’s appropriate to only cut rates at a gradual pace.
• The ECB is expected to cut deeper interest rates until April next year, noted HSBC analysts.

The EUR/GBP cross flat lines around 0.8355 during the early European session on Thursday. However, a less dovish stance from the Bank of England (BoE) might provide some support to the Pound Sterling (GBP). Traders will take more cues from the European Central Bank's (ECB) policymakers' speeches later in the day, including ECB President Christien Lagarde, Frank Elderson and Luis de Guindos. 

The cautious stance of the Bank of England (BoE) could underpin the GBP against the Euro (EUR). BoE policymaker Megan Greene said on Wednesday “I believe the risks to activity are to the upside, which could suggest that the long-run neutral rate is higher and - all else equal - our stance of policy isn’t as restrictive as we had thought.  Given this risk, I believe it is appropriate to take a gradual approach to removing restrictiveness.”

On the other hand, the downbeat Germany’s IFO reports earlier this week added to German recession fears, prompting the expectation of additional rate cuts and might cap the upside for the Euro (EUR) in the near term. The ECB is likely to cut deeper interest rates than previously expected, by lowering its key deposit rate by 25 basis points (bps) at each of its upcoming meetings from now until April next year, noted HSBC analysts. The Eurozone Consumer Confidence and  Industrial Confidence for September will be published on Friday. Any signs of improvement in the Eurozone economy could help limit the shared currency’s losses in the near term. 

ECB FAQs

What is the ECB and how does it influence the Euro?

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.

What is Quantitative Easing (QE) and how does it affect the Euro?

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.

What is Quantitative tightening (QT) and how does it affect the Euro?

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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