Sterling steadies before ECB rate decision

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Sterling steady before ECB decision

Highlights

Sterling trades at 85.89 pence per euro and $1.355 per dollar, showing little movement as markets await the ECB rate decision and U.S. inflation data.
Money markets expect the ECB to raise rates by 25 basis points to 2.5% and price in up to three hikes by March, contrasting with a more cautious Bank of England outlook.
UK July GDP is forecast to stall after 0.3% growth in June, leaving annual growth at 1.2%, and upcoming data may influence sterling's and rate expectations.

Market positioning before central bank signals

As reported by Reuters, sterling is little changed against the euro and the dollar on Thursday as investors avoid large bets before the ECB's policy decision and upcoming U.S. inflation reports.

The euro trades at 85.89 pence, broadly steady on the day, after staying mostly between 85.4 pence and 85.6 pence against sterling for much of the past six weeks. The pound also edges up against the dollar to $1.355.

Money markets expect the ECB to raise euro zone rates by a quarter point to 2.5% on Thursday. Traders also price in another increase by the end of the year and see an 80% chance of a third rise by March.

UK data and rate outlook in focus

By contrast, the Bank of England is not expected to raise rates next week. Markets price in only two increases between now and March, a path many analysts see as too aggressive after Governor Andrew Bailey pushes back against those expectations.

UK GDP data for July are due on Friday, with economists polled by Reuters expecting the economy to have stalled after 0.3% growth in June. That would leave annual growth at 1.2%, up from 1.1% the previous month.

Britain remains on track to be one of the G7's fastest-growing economies after strong first-half growth, but some support factors are likely to fade. George Vessey, lead FX and macro strategist at Convera, says unusually warm weather and the soccer World Cup are likely to provide less support going forward, creating risks for sterling and the interest-rate outlook.

He says a stronger GDP reading would help justify the roughly three rate hikes currently priced by summer 2027, while signs of weaker momentum could prompt a more dovish reassessment and leave the pound more exposed to downside pressure. UK inflation and wage growth data are due next week.

Our earlier report on the surge in UK gilt yields to a multi-decade high explained how rising oil prices and a global bond selloff were pushing Britain’s borrowing costs up. We also highlighted that, despite the jump in yields, demand at a new UK government debt auction remained firm, underscoring the broader repricing across UK assets.

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