EUR/GBP consolidates around 0.8550, downside likely on firm ECB rate cut bets

The EUR/GBP pair trades inside Thursday’s trading range in Friday’s European session. The cross struggles to extend its three-day winning spell on firm speculation that the European Central Bank (ECB) will start reducing interest rates from the June meeting.

The ECB has yet not announced a victory over price pressures in the Eurozone. However, ECB policymakers believe that inflation is on course to return to the desired rate of 2%. ECB Chief Economist Philip Lane said in a virtual guest lecture at the University of Stanford that inflation has declined at a faster pace than the ECB had initially expected. However, he warned that the next phase of disinflation will be more gradual.

For the entire year, investors see the ECB reducing interest rates three times. The speculation for three rate cuts strengthened after ECB Governing Council member and Governor of the Bank of Greece, Yannis Stournaras, said in Friday’s Asian session, “We now consider three rate cuts in 2024 as the more likely scenario”, Bloomberg reported.

Meanwhile, firm expectations for ECB rate cuts combined with stronger than expected Q1 Gross Domestic Product (GDP) numbers have improved the Eurozone economic outlook. Quantitative easing will result in a sharp increase in leakage of liquidity into the economy as businesses would be able to tap advances from commercial banks at lower borrowing rates.

On the United Kingdom front, investors shift focus to the Bank of England’s (BoE) interest rate decision, which will be announced on May 9. The BoE is widely anticipated to keep interest rates steady at 5.25% for the sixth time in a row. Therefore, investors will focus on fresh cues about when the BoE will start lowering borrowing rates. Traders have priced in the September meeting as the earliest point for pivoting to policy normalization.