Euro outperforms Pound Sterling as ECB prepares for another rate hike

EUR/GBP edges higher on Wednesday, extending its advance for the third consecutive day. At the time of writing, the cross trades around 0.8585, close to the upper boundary of the narrow consolidation range that has been in place since late July. Price action remains limited amid a light economic calendar in both the Eurozone and the United Kingdom.

The Euro (EUR) receives modest support from diverging near-term monetary policy expectations. The European Central Bank (ECB) is widely expected to raise its deposit rate by 25 basis points to 2.50% at its September 9-10 meeting, which would mark its second rate increase this year. Policymakers are seeking to contain inflation fuelled largely by the war in the Middle East, now in its seventh month, which has kept Oil prices elevated.

Tuesday’s Eurozone inflation figures reinforced expectations of another ECB rate increase. The preliminary Harmonized Index of Consumer Prices (HICP) accelerated to 3.3% YoY in August from 2.9% in July, moving further above the ECB’s 2% target.  ECB policymaker Gediminas Šimkus said on Tuesday, “It is clear that we should hike rates in September,” adding, “New projections are likely to move the rate path up a bit.”

In contrast, the Bank of England (BoE) is expected to leave its policy rate unchanged at 3.75% later this month despite UK inflation running above the central bank’s 2% target. BoE Governor Andrew Bailey said last week that the second-round effects of higher energy prices remained subdued. At its last monetary policy meeting, most policymakers judged that the tightening in financial conditions since the war in the Middle East began was providing sufficient protection against inflation risks stemming from higher energy prices.

According to a Reuters poll conducted between August 13 and 18, nearly 90% of economists, or 56 of 64, expect the BoE to leave interest rates unchanged at 3.75% through the end of 2026, up from 83% in the previous month’s survey. All respondents forecast no change at the central bank’s September meeting.

Looking ahead, the UK economic calendar remains relatively quiet for the rest of the week. In the Eurozone, the Producer Price Index (PPI) is due on Thursday, followed by Retail Sales data on Friday.