The Euro (EUR) rebounded against the British Pound (GBP) on Tuesday after initially slipping to a six-day low, with the EUR/GBP cross trading around 0.8587 following an intraday low near 0.8570 [1]. This recovery was driven by a weakening Pound, which lost ground against most major peers after Bank of England (BoE) Governor Andrew Bailey made cautious remarks during his testimony before the UK Treasury Select Committee. Bailey stated, 'Risks to inflation are to the upside,' and clarified, 'I do not think we are on the verge of a recession.' He also addressed market concerns, noting that the BoE rate curve reflects investor anxiety about further energy price rises and dispelled notions of a secret plan to raise rates unconditionally [1].
Market expectations, as reflected in a Reuters survey of 65 economists conducted between September 4 and 8, are that the BoE will keep the Bank Rate unchanged at 3.75% on September 17, with 57 of those surveyed expecting no change for the rest of the year [1]. In contrast, the European Central Bank (ECB) is widely anticipated to raise its deposit rate by 25 basis points to 2.50% on Thursday, marking its second increase this year. This divergence in monetary policy is expected to favor the Euro over the Pound [1].
UK fiscal concerns are also weighing on the Pound. UK Chancellor John Healey, in his first major speech since taking charge of the Treasury, asserted that the UK economy was 'turning a corner' but acknowledged the growing burden of high government borrowing costs on businesses and public finances [1]. Analysts at Rabobank highlighted the fragility of the Pound's backdrop, warning that the gilts market is particularly sensitive to negative budget-related news due to high foreign ownership. They cautioned that overseas buyers could react strongly to adverse news, potentially impacting the Pound negatively [1].
Rabobank further noted that current market positioning may leave the Pound vulnerable, with a hawkish outcome from the upcoming BoE meeting already priced in. They warned that any dovish signals could lead to further Pound weakness and projected that EUR/GBP could trend higher towards 0.87 over a three-month horizon, especially given the Pound's sensitivity to fiscal developments [1].
CONCLUSION
The Euro's rebound against the Pound is underpinned by diverging central bank policies and ongoing UK fiscal concerns. With the ECB expected to raise rates and the BoE likely to hold steady, analysts see further upside for EUR/GBP, particularly if UK fiscal risks persist or the BoE adopts a dovish tone.