Euro rallies against the Pound as markets brace for ECB's monetary policy decision

The Euro (EUR) appreciates for the sixth consecutive day against the British Pound on Thursday, with bulls testing last week’s highs at the 0.8645 area. The Sterling remains offered across the board as investors wonder how the new cabinet will fund its spending pledges. At the same time, the Euro maintains its firm tone, awaiting the European Central Bank’s (ECB) monetary Policy decision.

The pair has rallied nearly 0.9% over the last few days and is on track for its strongest weekly performance since May, mainly due to the Pound's weakness. The soft UK Inflation figures released on Wednesday have dampened expectations that the Bank of England will hike interest rates anytime soon, while on the political front, Prime Minister Andrew Burnham's spending plans are starting to raise concerns about fiscal stability.

ECB keeps September hike in view

The Euro, on the other hand, maintains a bid tone, heading into the outcome of the ECB's monetary policy meeting. Analysts at Commerzbank expect the ECB to stay its hand for now while keeping the door open to further tightening later in the year. They argue that “it is likely still too early for an interest rate hike today, but we stick to our view that the next move - to 2.50% - will occur in September.”
By then, they say, “the ECB will have the new forecasts available, based on which another interest rate hike could follow, provided it continues to be deemed necessary.” From a currency perspective, however, Commerzbank experts remain cautious that “the euro is unlikely to benefit much from the ECB meeting, barring any hawkish surprises from Lagarde.”