Euro trades flat vs British Pound as markets weigh ECB and BoE policy paths

The Euro traded flat against the British Pound on Tuesday, as the market weighed the differing policy paths of the European Central Bank (ECB) and the Bank of England (BoE). The EUR/GBP pair remained under pressure after buyers failed to break above the 0.8660 level, a former multi-month support now acting as resistance. The pair was trading around 0.8578 at the time of writing.

Traders were assessing the Middle East risks, particularly the impact on monetary policy outlooks in the Eurozone and the UK, amid elevated crude oil prices due to the ongoing conflict between the US and Iran. Both central banks have raised interest rates this year, with the ECB increasing its deposit facility rate to 2.50% and the BoE maintaining its Bank Rate at 3.75% for six consecutive meetings.

While policymakers expect both banks to raise borrowing costs in the coming months, they remain cautious due to the vulnerability of the Eurozone and the UK to higher energy costs, which complicate efforts to control inflation without disrupting economic growth. ECB policymaker Peter Kazimir stated that the latest rate hike was unavoidable, with energy prices remaining a key factor in the policy outlook.

ECB policymaker José Luis Escrivá added that interest rates were still not in restrictive territory, warning that the global upward trend in long-term bond yields could add pressure to rates. ECB President Christine Lagarde noted on Monday that there were still upside risks to inflation and downside risks to growth, stating that the ECB sees higher inflation ahead but has not yet observed it becoming embedded.

Lagarde emphasized the ECB's preference for a measured response to keep inflation in check. The focus shifted to a busy week of central bank speeches and economic data, with traders monitoring UK second-quarter GDP, German preliminary inflation, and Retail Sales on Wednesday, followed by the Eurozone's preliminary inflation report on Friday.