Euro holds lower against British Pound ahead of ECB decision

• A five-week decline leaves EUR/GBP on course for a 2.8% loss as it consolidates below 0.8400.
• Interest rates are expected to remain unchanged at the ECB meeting, with the bank signalling a possible December increase.
• Wednesday’s Budget from Chancellor Healey prompted little movement in GBP.

With a 2.8% decline over a five-week downtrend still in prospect, EUR/GBP slips towards 0.8365 from a session high of 0.8374 on Thursday. The Euro (EUR) is modestly lower against the British Pound (GBP), though the pair remains inside Wednesday’s trading range ahead of the European Central Bank’s (ECB) monetary policy decision later in the day.

The ECB’s benchmark interest rate is widely forecast to stay at 2.5%, with a December increase remaining a possibility as inflation across the Euro Area continues to rise well above the bank’s target. Looming over the decision, however, is France’s debt burden. It has reached critical levels, fuelling concerns about a further credit crisis in the Euro Area.

France’s debt risks constrain the ECB’s tightening path

Assessing the outlook, Commerzbank analysts warn that “every interest rate hike by the ECB naturally also raises yields and thus exacerbates France’s problem of getting its public debt under control due to rising interest payments.”

Commerzbank therefore expects the ECB “to exercise caution when it comes to announcing further interest rate hikes next year,” noting that “overall inflation (due to the base effect) will fall next year,” which offers a further argument for a “wait-and-see stance.”

Sterling showed little reaction to the UK Budget, the first presented by Chancellor John Healey under Prime Minister Andy Burnham’s cabinet. The measures included a GBP 100 energy payment for up to 20 million households, the abolition of standing charges, and higher taxes on property rentals, large individual savings and bank profits.

Against a backdrop of robust economic growth and mounting inflationary pressures, the Bank of England is widely expected to raise interest rates by a quarter point at next week’s meeting. That prospect is likely to limit declines in the Pound over the coming days.