EUR/GBP advances towards 0.8450, upside looks limited due to dovish ECB tone

  • EUR/GBP gains ground despite dovish sentiment surrounding the ECB following its September decision.
  • ECB’s François Villeroy de Galhau believes the central bank should consider cutting rates at its next meeting.
  • BRC comparable retail sales rose 0.8% year-on-year in August, compared with the previous increase of 0.3%.

The EUR/GBP pair is extending gains for the second consecutive day, trading around 0.8430 during the European session on Tuesday. However, the upside potential for the EUR/GBP pair may be limited as the Euro is under pressure amid strong speculation that the European Central Bank (ECB) will cut interest rates in September.

This would mark the second interest rate cut by the ECB since it began shifting toward policy normalization in June. Policymakers remain confident that inflation will gradually return to the bank’s 2% target by 2025.

ECB Governing Council member Francois Villeroy de Galhau said on Friday, according to Bloomberg, that there are “good reasons” for the central bank to consider cutting its key interest rates in September. Villeroy de Galhau suggested that action should be taken at the next meeting on September 12, noting that it would be fair and prudent to decide on a further rate cut.

In the United Kingdom (UK), BRC comparable retail sales rose 0.8% year-on-year in August, up from a 0.3% increase in July, marking the fastest growth in five months. On Monday, the S&P Global UK manufacturing PMI held steady at 52.5 for August, consistent with preliminary estimates.

The EUR/GBP pair may struggle as traders anticipate no rate cut by the Bank of England (BoE) at the September meeting, while the likelihood of a 25 basis points (bps) interest rate cut at the November meeting stands at 87.2%.

Traders are awaiting BoE Deputy Governor Sarah Breeden’s role as moderator of a panel on supervisory cooperation at a joint conference hosted by the European Central Bank and the European Banking Authority on Tuesday.

ECB FAQs


The European Central Bank (ECB), based in Frankfurt, Germany, is the reserve bank of the Eurozone. The ECB sets interest rates and manages monetary policy in the region.
The ECB’s main mandate is to maintain price stability, which means keeping inflation at around 2%. Its main tool for achieving this is to raise or lower interest rates. Relatively high interest rates usually translate into a stronger Euro, and vice versa.
The ECB’s Governing Council takes monetary policy decisions at meetings held eight times a year. Decisions are taken by the heads of the euro area’s national banks and six permanent members, including ECB President Christine Lagarde.


In extreme situations, the European Central Bank can put in place a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets (usually government or corporate bonds) from banks and other financial institutions. The result is usually a weaker Euro.
QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis of 2009-11, in 2015 when inflation remained stubbornly low, as well as during the coronavirus pandemic.


Quantitative tightening (QT) is the reverse of QE. It takes place after QE, when the economic recovery is underway and inflation starts to rise. While in QE the European Central Bank (ECB) buys government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds and stops reinvesting the maturing principal of the bonds it already owns. It is usually positive (or bullish) for the Euro.

Source: Fx Street

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