What's Next for EUR/GBP Post ECB and BOE

Following the ECB's interest rate cut and the BOE's hold, EUR/GBP has traded sideways as inflation expectations now outweigh interest rate differentials.

The Expected vs the Unexpected

The June meetings of the ECB and BOE largely met expectations, with the ECB starting its easing cycle as signalled over previous months and the BOE keeping policy unchanged until after the UK General Election. As a result of the ECB's widely expected cut, the pound has traded slightly stronger than the euro in preceding weeks, likely reflecting the widening interest rate gap between the two economies to 100 basis points. There is speculation that this could narrow if the BOE cuts rates and the ECB holds rates in the next rate decision cycle.

Previously, the ECB's actions revealed more certitude than the BOE's. However, the positions have now reversed as the latter appears more likely to cut rates before the ECB proceeds with a second cut. Inflation in the UK fell faster than in Europe and the US, increasing pressure on the BOE to reduce rates at its next meeting. In contrast, given its recent policy easing, the ECB has scope to wait.

Getting the Timing Right

Markets currently price a 50% chance of a UK rate cut in August, which is in line with most economists' views. Meanwhile, economists expect the ECB to cut in October. Both central banks are forecast to follow similar trajectories, with two further cuts each by year-end. This would leave the BOE with a tighter policy stance, enacting two cuts to the ECB's three.

However, fast-falling UK inflation could impact the rate differential. The UK has a real interest rate of 3.25% compared to 1.9% for the Euro Area, a 140 basis point gap. If UK inflation continues falling faster while remaining hot in the EU, it could offset the effects of BOE rate cuts in real terms. This may support the pound against the euro, especially given signs the usually hawkish ECB members now accept the possibility of three rate cuts this year. The Netherlands's Klaas Knot was the latest to agree that as many as three rate cuts are possible this year.

EURGBP Under Pressure

While the euro declined against the pound after the ECB's decision, falling to 0.8428, the pair has since returned to its underlying less-accelerating trend. However, it remains below the pressure points of 0.8526 and the channel's upper barrier near 0.8550. If it holds firm at around 0.85 in the near term, it could potentially reverse its direction and go back down. This could lead to a double bottom pattern forming unless it slides lower down to 0.84.

Source: SpreadEx / EURGBP

Key Takeaways

Following the ECB's interest rate cut and the BOE's hold, EUR/GBP has traded sideways as inflation expectations now outweigh interest rate differentials. The BOE is expected to cut rates in August, while the ECB may follow in October, which could narrow the interest rate gap between the two economies. However, falling UK inflation could offset the effects of BOE rate cuts in real terms and support the pound against the euro.