Euro holds lower against British Pound ahead of ECB decision

• 2.8% decline in sight for EUR/GBP over a five-week slide; consolidation continues below 0.8400.
• A December rate hike is expected to be signalled by the ECB as it keeps interest rates unchanged.
• Wednesday’s budget from Chancellor Healey left the GBP broadly unchanged.

EUR/GBP remains on course for a 2.8% decline over five weeks. On Thursday, the Euro (EUR) edges lower against the British Pound (GBP), staying inside Wednesday’s trading range ahead of the European Central Bank’s (ECB) monetary policy decision later in the day. The pair has slipped from a session high of 0.8374 to around 0.8365.

At 2.5%, the ECB’s benchmark interest rate is widely expected to remain unchanged. With Euro Area inflation continuing to rise well above the bank’s target, policymakers are also expected to keep a December rate increase on the table. France’s debt, however, remains the central concern. It has reached critical levels, intensifying fears of another credit crisis in the Euro Area.

France’s debt clouds ECB tightening outlook

Commerzbank analysts warn of the implications for future policy: “every interest rate hike by the ECB naturally also raises yields and thus exacerbates France’s problem of getting its public debt under control due to rising interest payments.”

Commerzbank therefore expects the ECB “to exercise caution when it comes to announcing further interest rate hikes next year,” noting that “overall inflation (due to the base effect) will fall next year,” which offers an additional reason for a “wait-and-see stance.”

Sterling showed little reaction to the UK budget, the first presented by Chancellor John Healey for Prime Minister Andy Burnham’s cabinet. The measures included a GBP 100 energy payment for up to 20 million households, the abolition of standing charges and higher taxes on property rentals, large individual savings and bank profits.

Robust economic growth and increased inflationary pressures underpin widespread expectations that the Bank of England will raise interest rates by a quarter point at next week’s meeting. That prospect is likely to limit declines in the Pound in the days ahead.