EUR/GBP holds steady as traders stay sidelined ahead of BoE and ECB meetings

The Euro (EUR) remains range-bound against the British Pound (GBP) at the start of the week, as traders stay on the sidelines and avoid large directional bets ahead of this week’s interest-rate decisions from the Bank of England (BoE) and the European Central Bank (ECB). At the time of writing, EUR/GBP is trading around 0.8660, a little changed on the day.

The BoE and the ECB will announce their monetary policy decisions on Thursday, and investors broadly expect both central banks to maintain current interest rates.

At its last meeting, the BoE lowered the Bank Rate by 25 basis points (bps) to 3.75% and reiterated that the scale and timing of further easing would depend on how the inflation outlook evolves, noting that policy is likely to follow a gradual downward path, even as future decisions are becoming a “closer call”.

The latest inflation data, however, continues to underline the BoE’s caution. Headline Consumer Price Index (CPI) rose 0.4% MoM, in line with expectations, after a 0.2% decline in November. On an annual basis, CPI accelerated to 3.4% from 3.2%, while core inflation held steady at 3.2%, leaving price pressure well above the central bank’s 2% target.

On the other side of the cross, the ECB left borrowing costs unchanged for a fourth consecutive time at its previous policy meeting, keeping the Deposit Facility, the Main Refinancing Operations and the Marginal Lending Facility rates at 2.00%, 2.15% and 2.40%, respectively.

The Governing Council reiterated its commitment to ensuring that inflation stabilises at its 2% target over the medium term and stressed that interest rate decisions would continue to be taken on a meeting-by-meeting basis.

However, the recent strength of the Euro against the US Dollar (USD) is increasingly seen as a downside risk to growth and inflation, and traders will be watching closely how the policymakers address currency developments in their policy message on Thursday.

On the data front, traders showed a muted reaction to the latest manufacturing Purchasing Managers Index (PMI) releases. In the UK, the S&P Global Manufacturing PMI rose to 51.8 in January from 51.6 previously, coming in above market expectations.

In the Eurozone, the Hamburg Commercial Bank HCOB Manufacturing PMI edged up to 49.5 in January from 49.4 previously, coming in above market expectations of 49.4, but remained in contraction territory.