Euro Gains Upper Hand as ECB and BoE Policy Expectations Diverge

The EUR/GBP exchange rate has edged higher on Wednesday, with the Euro holding a slight advantage over the British Pound in the near term. This is due to diverging expectations for European Central Bank (ECB) and Bank of England (BoE) policy moves.

Higher energy prices caused by the war in the Middle East prompted the ECB to raise interest rates by 25 basis points in June, with markets almost fully pricing in another increase at the September meeting. This would lift the deposit rate from 2.25% to 2.50%. ECB Executive Board member Isabel Schnabel strengthened expectations of additional tightening on Wednesday, saying that inflation is likely to stay above the ECB's 2% target for an 'extended period.'

In contrast, the BoE kept the Bank Rate unchanged at 3.75% at its latest meeting despite UK inflation staying above the central bank's 2% target. Analysts at Rabobank note that policy expectations are central to their cautious stance on Sterling, and they maintain a 3-month EUR/GBP forecast of 0.87.

Rabobank warns that steady policy could undermine the Pound, as it remains their central view that the Monetary Policy Committee will continue to side-step a rate hike this year. They expect further range trading in EUR/GBP over the coming weeks, with a mild upside bias later in the year as fiscal realism weighs and BoE rate hike risk is further priced out.