The EUR/GBP pair has been losing ground recently, trading around 0.8390 during the Asian session on Friday. This downward movement can be attributed to lower inflation data in the Eurozone, which has increased expectations of a rate cut by the European Central Bank (ECB) in October. The Harmonized Index of Consumer Prices dropped to 1.8% year-over-year in September, falling below the ECB’s 2% target and marking the lowest reading since April 2021. As a result, markets are now pricing in a 95% probability of a 25 basis point rate cut by the ECB this month, which would be the third reduction this year.
Despite the recent weakness in the EUR/GBP pair, the cross saw some gains following dovish comments made by Bank of England (BoE) Governor Andrew Bailey on Thursday. Governor Bailey mentioned the possibility of the central bank becoming “a bit more aggressive” in cutting interest rates if inflation continued to be subdued. The BoE is widely expected to lower the policy rate by 25 basis points at the November meeting, further supporting the GBP against the EUR.
The latest Bank of England Decision Maker Panel (DMP) survey, released on Thursday, provided further insight into inflation expectations by UK firms. The survey indicated that one-year ahead expected CPI inflation by UK firms declined by an additional 0.1% to 2.6% in the quarter ending in September. Despite this decrease, expected year-ahead wage growth remained steady at 4.1% on a three-month moving average in September. Additionally, business uncertainty decreased over the same period, suggesting some level of stability in the UK economy.
In conclusion, the EUR/GBP pair has been experiencing downside pressure due to lower inflation data in the Eurozone, while the GBP received some support from dovish comments by BoE Governor Bailey. With the likelihood of an ECB rate cut in October and expectations of a BoE rate cut in November, the currency pair is likely to continue experiencing volatility in the near term. Traders will be closely monitoring any further developments in inflation data and central bank policies to determine the future trajectory of the EUR/GBP exchange rate.
