- EUR/GBP rose to around 0.8340 in early European trading on Tuesday.
- ECB President Wansch said it was too early to discuss December's policy decisions.
- The central bank is likely to cut its policy rate by 4.5 percentage points to 4.75% at its November meeting, according to a Reuters poll.
The euro/pound cross was trading in positive territory at around 0.8340 in early European trading on Tuesday. The price of the euro (EUR) against the British pound (GBP) rose following comments from European Central Bank (ECB) policymaker Pierre Wunche. Investors are waiting for preliminary third-quarter gross domestic product (GDP) figures for Germany and the euro zone to be released on Wednesday.
ECB officials are divided on the need for deep cuts. ECB policymaker and Belgian central bank governor Pierre Wunche said on Monday there was no urgency for the central bank to cut rates more quickly and that it could respond with smaller rate cuts. Non-dovish comments provide some support for a common currency. Meanwhile, ECB Vice President Luis Deguindos said on Monday that the central bank had made significant progress in curbing inflation but could not yet declare victory.
Despite this, money markets are still pricing in a nearly 50% chance that the ECB will cut interest rates by 0.5 percentage point at its December meeting. Wednesday's GDP figures could provide hints about the health of Germany and the eurozone economy. A weaker-than-expected result raises the possibility that the ECB will cut interest rates in December, potentially weighing on the euro's weakness.
Meanwhile, expectations that the Bank of England's (BoE) rate-cutting cycle will be slower than in the eurozone could help limit losses for the pound. Economists in a Reuters poll expect the Bank of England to cut interest rates by a quarter of a percentage point to 4.75% on November 7, but nearly two-thirds say no move will be made in December. I predict that.
ECB FAQ
The European Central Bank (ECB), located in Frankfurt, Germany, is the reserve bank of the euro area. The ECB sets regional interest rates and controls monetary policy. The ECB's main mission is to maintain price stability, which means keeping inflation around 2%. The main means of achieving this is by raising or lowering interest rates. Relatively high interest rates usually result in a strong euro and vice versa. The ECB Governing Council decides monetary policy at its eight annual meetings. Decisions will be made by the heads of the euro zone national banks and the six permanent members of the ECB, including ECB President Christine Lagarde.
In extreme circumstances, the European Central Bank can enact a policy measure called quantitative easing. QE is a process in which the ECB prints euros and uses them to buy assets (usually government and corporate bonds) from banks and other financial institutions. QE usually leads to a weaker euro. Quantitative easing is a last resort when the objective of price stability cannot be achieved by simply lowering interest rates. The ECB used this system during the Great Financial Crisis of 2009-2011, in 2015 when inflation remained stubbornly low, and during the coronavirus pandemic.
Quantitative tightening (QT) is the opposite of QE. This is done after quantitative easing, when economic recovery is underway and inflation begins to rise. In QE, the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide liquidity, but in QT, the ECB suspends additional bond purchases and waits until the maturity of bonds it already owns. Stop reinvesting principal. Usually positive (or bullish) for the euro.
