Euro outperforms Pound Sterling as ECB prepares for another rate hike

The Euro (EUR) is outperforming the Pound Sterling (GBP) as the European Central Bank (ECB) prepares for another rate hike. On Wednesday, the EUR/GBP cross trades around 0.8585, nearing the upper limit of the narrow range established since late July. Limited economic activity in both the Eurozone and the United Kingdom has kept price action subdued.

The ECB is widely anticipated to raise its deposit rate by 25 basis points to 2.50% during its September 9-10 meeting, marking its second increase this year. This move aims to curb inflation fueled by the ongoing Middle East conflict, which has kept oil prices elevated. Inflation figures released on Tuesday revealed a YoY acceleration to 3.3% in August from 2.9% in July, surpassing the ECB's 2% target.

ECB policymaker Gediminas Šimkus stated that a rate hike in September is evident, with new projections suggesting a further upward adjustment. In contrast, the Bank of England (BoE) is expected to maintain its policy rate at 3.75% later this month, despite UK inflation exceeding the central bank's 2% target. At the last monetary policy meeting, most policymakers believed that tightening financial conditions due to the Middle East conflict provided sufficient protection against inflation risks stemming from higher energy prices.

A Reuters poll found that 90% of economists, or 56 out of 64, expect the BoE to keep interest rates unchanged at 3.75% through the end of 2026, with all respondents forecasting no change at the September meeting. The UK economic calendar remains relatively light for the rest of the week, with the Producer Price Index (PPI) due on Thursday and Retail Sales data on Friday.