Euro wavers around 0.8590 against British Pound with all eyes on the ECB
- EUR/GBP treads water around 0.8590 with all eyes on the ECB.
- The European Central Bank is widely expected to hike rates for the second time this year.
- Commerzbank analysts affirm that the Euro might fall if Lagarde fails to show a clear hawkish stance.
The Euro (EUR) is trading sideways in a 15-pip range, roughly between 0.8580 and 0.8595 against the British Pound (GBP) on Thursday. Higher oil prices are capping the Euro’s upside attempts while dips remain limited, as traders are reluctant to place large Euro shorts ahead of the European Central Bank’s (ECB) monetary policy decision, due later in the day.
The ECB is widely expected to hike its benchmark interest rate by 25 basis points to 2.5%, and investors anticipate a hawkish message from President Christine Lagarde, as rising Oil prices are likely to keep consumer prices above the bank’s 2% target for a protracted period.
ECB faces asymmetric risks
Analysts at Commerzbank, however, caution that “even if the ECB and its president, Christine Lagarde, were intent on delivering so many interest rate rises (which would already be ambitious), officials would certainly not want to commit to this today.”
Commerzbank analysts expect the central bank to “wait and see how the situation in the Middle East develops and what further price pressures lie ahead,” limiting the scope for any bold forward guidance. In this context, the experts assess the balance of risks “asymmetrically distributed today: for a stronger euro, the ECB would have to adopt a very hawkish stance, whereas for a weaker euro, it would only need to disappoint the market's advanced expectations.”
In the UK, the highlight this week is the monthly Gross Domestic Product (GDP) and Industrial Production data for July, which are expected to show a deteriorating trend. These figures would bolster the case for a steady monetary policy at the Bank of England's (BoE) meeting next week. Investors, however, will be looking for any hint that would keep hopes of a 2026 rate hike alive.
Central banks FAQs
Central Banks have a key mandate which is making sure that there is price stability in a country or region. Economies are constantly facing inflation or deflation when prices for certain goods and services are fluctuating. Constant rising prices for the same goods means inflation, constant lowered prices for the same goods means deflation. It is the task of the central bank to keep the demand in line by tweaking its policy rate. For the biggest central banks like the US Federal Reserve (Fed), the European Central Bank (ECB) or the Bank of England (BoE), the mandate is to keep inflation close to 2%.
A central bank has one important tool at its disposal to get inflation higher or lower, and that is by tweaking its benchmark policy rate, commonly known as interest rate. On pre-communicated moments, the central bank will issue a statement with its policy rate and provide additional reasoning on why it is either remaining or changing (cutting or hiking) it. Local banks will adjust their savings and lending rates accordingly, which in turn will make it either harder or easier for people to earn on their savings or for companies to take out loans and make investments in their businesses. When the central bank hikes interest rates substantially, this is called monetary tightening. When it is cutting its benchmark rate, it is called monetary easing.
A central bank is often politically independent. Members of the central bank policy board are passing through a series of panels and hearings before being appointed to a policy board seat. Each member in that board often has a certain conviction on how the central bank should control inflation and the subsequent monetary policy. Members that want a very loose monetary policy, with low rates and cheap lending, to boost the economy substantially while being content to see inflation slightly above 2%, are called ‘doves’. Members that rather want to see higher rates to reward savings and want to keep a lit on inflation at all time are called ‘hawks’ and will not rest until inflation is at or just below 2%.
Normally, there is a chairman or president who leads each meeting, needs to create a consensus between the hawks or doves and has his or her final say when it would come down to a vote split to avoid a 50-50 tie on whether the current policy should be adjusted. The chairman will deliver speeches which often can be followed live, where the current monetary stance and outlook is being communicated. A central bank will try to push forward its monetary policy without triggering violent swings in rates, equities, or its currency. All members of the central bank will channel their stance toward the markets in advance of a policy meeting event. A few days before a policy meeting takes place until the new policy has been communicated, members are forbidden to talk publicly. This is called the blackout period.
