Euro consolidates against British Pound after losses: what next ahead of ECB decision?

• EUR/GBP remains in consolidation below 0.8400, with its five-week downtrend set to deliver a 2.8% fall.
• Expectations point to unchanged ECB interest rates and a signal of a possible December rate hike.
• Wednesday’s budget announcement by Chancellor Healey left the GBP largely unchanged.

Modest selling pressure weighs on the Euro (EUR) against the British Pound (GBP) on Thursday, although trading remains inside Wednesday’s range ahead of the European Central Bank’s (ECB) monetary policy decision later in the day. After touching a session high of 0.8374, EUR/GBP slips towards 0.8365, staying on course for a 2.8% decline over its five-week downtrend.

With Euro Area inflation continuing to rise well above its target, the ECB is widely expected to retain its 2.5% benchmark interest rate while keeping a December increase on the table. France’s debt, however, is set to be the central concern: it has reached critical levels, intensifying fears of another credit crisis in the Euro Area.

Could France’s debt risks complicate the ECB’s tightening path?

On 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.”

Given these circumstances, Commerzbank 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 an additional argument for a “wait-and-see stance.”

The Pound showed little reaction to the UK budget, the first presented by Chancellor John Healey under Prime Minister Andy Burnham’s cabinet. Healey’s announcements 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.

Limited declines in the Pound are likely over the coming days as markets widely expect the Bank of England to raise interest rates by a quarter point at next week’s meeting, against a backdrop of strong economic growth and increased inflationary pressures.