EUR/GBP edges higher on Friday, recovering losses recorded in the previous day after the European Central Bank (ECB) and Bank of England (BoE) monetary policy announcements. At the time of writing, the cross trades near 0.8647, remaining confined within a narrow range that has defined price action for more than a week.
The Euro (EUR) outperforms the British Pound (GBP) on Friday as traders anticipate the ECB could raise rates sooner than expected, even as markets price in multiple rate hikes by the BoE.
Both the ECB and the BoE kept interest rates unchanged at 2% and 3.75%, respectively, on Thursday, while highlighting rising inflation risks driven by higher Oil and energy prices amid the ongoing US-Israel war with Iran.
The ECB said it is not pre-committing to any specific rate path and will base decisions on the inflation outlook and related risks, while the BoE offered limited forward guidance, stating it “stands ready to act as necessary to ensure that inflation remains on track to meet the 2% target in the medium term.”
The ECB’s latest projections point to increasing uncertainty in the economic outlook. For 2026, growth is seen at 0.9% in the baseline scenario, slowing to 0.6% under the adverse scenario and 0.4% in a severe scenario.
At the same time, inflation is projected to rise to 2.6% in the baseline, accelerating to 3.5% in the adverse case and 4.4% in the severe scenario.
Meanwhile, the BoE also revised its inflation outlook higher, expecting the Consumer Price Index (CPI) to average around 3% in Q2 2026, up from 2.1% in its February projections.
Both the Eurozone and the UK are net energy importers, meaning higher Oil and energy prices can push inflation higher while weighing on economic growth, raising stagflation risks. However, the ECB appears relatively better positioned, with inflation still close to its 2% target. In contrast, UK inflation remains above the BoE’s target, reducing the scope for aggressive rate hikes to counter an Oil-driven inflation shock.
Markets now fully price an ECB rate hike by July and another by year-end, with some analysts pointing to a possible move as early as April. In the UK, markets are pricing in more than two BoE rate hikes this year, with roughly a 50% chance of an April hike.
ECB Governing Council member Gabriel Makhlouf said on Friday that “two rate hikes are part of the ECB’s baseline scenario,” adding that “if facts point to action, the ECB will take action.” Meanwhile, Madis Müller noted that “a rate hike may be appropriate if inflation is persistent,” while Bundesbank President Joachim Nagel said the ECB “would need an April hike if the price outlook sours.”
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
Source: https://www.fxstreet.com/news/eur-gbp-rises-as-markets-assess-ecb-and-boe-rate-decisions-inflation-outlook-202603201344
