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- Euro may gain support as markets have fully priced in a 25 basis point rate hike to 2.5% on Thursday.
- Surging energy prices driven by the US-Iran conflict are fueling the European Central Bank’s expected decision.
- BoE Governor Bailey stressed that global conflicts are driving energy prices higher, keeping UK inflation risks elevated.
EUR/GBP remains steady after experiencing volatility, hovering around 0.8580 during European hours on Wednesday. However, the currency cross may gain ground as the Euro (EUR) could receive support ahead of the looming European Central Bank (ECB) monetary policy decision.
The ECB is widely expected to hike interest rates at its September policy meeting on Thursday, driven by surging energy prices due to the ongoing US-Iran conflict. Traders have fully priced in a 25-basis-point (bps) move to 2.5% as the latest data shows Eurozone inflation rose back above 3% in August.
ING’s global head of macro Carsten Brzeski said, “We expect the ECB to hike rates by 25 basis points. Another insurance rate hike.” “Or for those who don’t like this term: a dovish rate hike,” Brzeski added.
Bailey flags upside inflation risks as energy shock keeps Pound on edge
FXS Speechtracker shows a 7.2/10 score versus a 6/10 historic average, signalling a more hawkish Bank of England (BoE) Governor Andrew Bailey than usual as upside inflation risks dominate the message. By stressing that the U.S.–Iran war and Ukrainian attacks on Russian refineries are driving energy and refined product prices higher, Bailey underlines a persistent cost-push threat that keeps UK inflation risks skewed to the upside and supports Pound resilience on dips.
The warning that UK mortgage rates have risen more than almost anywhere in the G7 acknowledges tightening already in the system, but Bailey’s comment that market rate curves reflect concern about further energy price rises reinforces a bias toward staying restrictive for longer. The attempt to dispel the idea of a “secret plan” to hike rates does little to offset the overall hawkish tone, leaving markets inclined to price out aggressive BoE cuts and to favor the Pound against lower-yielding peers.
