EUR/GBP drops to near 0.8540 following dovish comments from ECB’s policymakers

• EUR/GBP edges lower on dovish remarks from ECB policymakers.
• ECB’s Villeroy has expressed confidence in the ECB’s inflation target of 2%, but he has also cautioned about the increasing downside risks.
• BoE official Jonathan Haskel said that rate cuts should be “a long way off”.

EUR/GBP continues its downward movement, influenced by challenges facing the Euro following dovish comments from European Central Bank (ECB) policymaker Francois Villeroy. During the Asian session on Friday, the EUR/GBP cross depreciates to near 0.8540.

Villeroy highlighted a notable decline in core inflation. He expressed confidence in the ECB to achieve an inflation target of 2% but cautioned about escalating downside risks if the ECB hesitates to implement rate cuts.

Moreover, ECB executive board member Fabio Panetta emphasized on Thursday that the conditions for implementing monetary policy easing are emerging. He pointed out that restrictive policies are dampening demand, resulting in a rapid decrease in inflation. Panetta also indicated a reduction in risks to price stability.

The Pound Sterling (GBP) maintains its position, possibly due to the hawkish comments from the Bank of England official Jonathan Haskel. He said that rate cuts should be “a long way off,” while his colleague Catherine Mann warned against overly high expectations for interest rate cuts this year.

Despite Bank of England officials expressing reluctance towards rate cuts, the British Pound (GBP) may have faced downward pressure following economic data indicating that the United Kingdom’s (UK) economy entered a recession in the second half of 2023. The nation’s Gross Domestic Product (GDP) contracted by 0.3% quarter-on-quarter in the fourth quarter of 2023, in line with preliminary estimates.

Speculation persists that the Bank of England (BoE) will initiate three quarter-point reductions in rates throughout 2024. BoE Governor Andrew Bailey stated that interest rate cuts will be under consideration at future BoE policy meetings.