The Euro (EUR) fell against the British Pound (GBP) on Wednesday, with the EUR/GBP pair fluctuating within its familiar one-week range as caution dominates broader FX markets ahead of a Federal Reserve (Fed) interest rate decision later in the day.
At the time of writing, the pair is trading near the 0.8730 level, retreating after reaching an intraday high of 0.8751 during early European trading hours.
With the Federal Reserve set to cut interest rates, traders await fresh guidance on the outlook for 2026. Any adjustment in policy path could reshape global spreads and broader market sentiment, creating spillover effects across major currency pairs, including EUR/GBP.
Meanwhile, attention is gradually turning towards next week’s monetary policy meetings from the European Central Bank (ECB) and the Bank of England (BoE).
Markets widely expect the Bank of England to cut interest rates at its next meeting. However, comments from the Bank of England this week reveal an internal difference. Policymaker Alan Taylor said he expects UK inflation to fall to the 2% target in the near term, which he believes creates scope for additional interest rate cuts.
Deputy Governor Claire Lombardelli sounded a more cautious tone, noting that some upside risks to inflation remain, and said that the pace of cuts may need to slow as the Bank of England approaches the end of the current reduction cycle.
In the euro zone, the European Central Bank is expected to keep the three key interest rates unchanged next week. However, speculation is growing about the possibility of a rate hike next year after a series of tough statements from European Central Bank policymakers.
Governing Council member Gediminas Simkus said earlier on Wednesday that there was no need to change interest rates while inflation was on target. His comments followed a Bloomberg interview published on Monday, in which Isabel Schnabel said she was “fairly comfortable” with market expectations that the ECB’s next move could eventually be to raise interest rates.
Adding to the latest comments, European Central Bank President Christine Lagarde said on Wednesday that the euro zone economy is showing signs of resilience and that the Governing Council may raise its growth forecasts at its December meeting.
She noted that the current policy stance remains appropriate given inflation’s continued progress towards target, while also emphasizing that the ECB will continue to rely on incoming data to determine the timing of any future adjustment.
European Central Bank Frequently Asked Questions
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the euro area. The European Central Bank sets interest rates and manages monetary policy for the region. The ECB’s primary mandate is to maintain price stability, which means keeping inflation at around 2%. The primary tool for achieving this is raising or lowering interest rates. Relatively high interest rates usually lead to a stronger euro and vice versa. The ECB’s Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the eurozone’s national banks and the six permanent members, including the President of the European Central Bank, Christine Lagarde.
In extreme situations, the ECB can activate a policy tool called quantitative easing. Quantitative easing is the process by which the European Central Bank prints euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. Quantitative easing usually leads to a weaker euro. Quantitative easing is considered a last resort when simply lowering interest rates is unlikely to achieve the goal of price stability. The European Central Bank used it during the great financial crisis of 2009-2011, in 2015 when inflation remained stubbornly low, and also during the coronavirus pandemic.
Quantitative tightening (QT) is the opposite of quantitative easing. It is implemented after quantitative easing when the economic recovery is underway and inflation begins to rise. While in the QE program the European Central Bank (ECB) buys government bonds and corporate bonds from financial institutions to provide them with liquidity, in the QT program the ECB stops buying more bonds, and stops reinvesting the capital owed on the bonds it already holds. It is usually positive (or bullish) for the EUR.
