EUR/GBP holds firm on Tuesday, extending its recovery from the more than one-year low touched earlier this month as diverging monetary policy expectations between the European Central Bank (ECB) and the Bank of England (BoE), along with UK fiscal concerns, weigh on the British…
und (GBP). At the time of writing, the cross trades around 0.8550, near a three-week high
Analysts at OCBC note that sentiment toward the British Pound has turned more cautious, with “some of the recent optimism” now having “faded” as earlier hopes for “greater political stability in the UK are increasingly giving way to concerns over fiscal constraints.” They argue that “this reassessment has further to run, particularly as higher energy prices add to fiscal pressures,” leaving the Pound on a weaker footing. In this context, OCBC reiterates that it “continues to expect EURGBP to recover towards 0.87 over the coming months, in line with our broader view that GBP remains range-bound.” BoE interest-rate decision looms The central bank can afford to maintain a steady approach as the inflationary impact of higher Oil prices has so far been contained in the UK. Headline inflation fell to a 15-month low of 2.6% in June, while signs of weakness in the labour market provide another reason to keep borrowing costs unchanged.
Inflation risks have not disappeared, particularly with energy prices trading above their pre-war levels. However, most economists surveyed by Reuters expect the BoE to keep interest rates unchanged through the end of the year. In contrast, the ECB is expected to consider another rate hike as early as September.