EUR/GBP Rebounds on Bailey's Comments Ahead of ECB Rate Hike

The EUR/GBP exchange rate rebounded on Tuesday after reaching a six-day low, as sterling weakened against most major currencies following Bank of England Governor Andrew Bailey's cautious comments.

Bailey told the UK Treasury Select Committee that inflation risks remained skewed to the upside and he did not expect an imminent recession. He also pushed back against the notion of an unconditional tightening path for interest rates.

This stance suggests that the Bank of England will likely keep its Bank Rate unchanged at 3.75% on September 17, in line with the views of all 65 economists polled by Reuters between September 4 and 9. Meanwhile, the European Central Bank is expected to raise its deposit rate by 25 basis points to 2.50% this Thursday.

Rabobank pointed out that sterling's positioning leaves it exposed, particularly given the high level of foreign ownership in UK government bonds. The bank sees EUR/GBP biased higher towards 0.87 over the next three months.