Euro slides against Pound as ECB decision looms amid geopolitical tensions

The Euro extends its decline against the British Pound for a second straight day.
Traders stay cautious ahead of the ECB monetary policy decision on Thursday.
Political unrest in France and NATO consultations after Poland’s airspace breach weigh on Euro sentiment.

The Euro (EUR) extends its decline against the British Pound (GBP) for a second consecutive day on Wednesday, with the EUR/GBP cross hovering near 0.8643 at the time of writing. The pair is showing some stabilization after briefly touching its lowest level since August 29 earlier in the European session. Investors are reluctant to take big positions ahead of the European Central Bank’s (ECB) monetary policy decision due on Thursday.

Market participants broadly expect the ECB to keep interest rates unchanged after delivering multiple cuts earlier this year. With the deposit rate at 2.0%, economists increasingly believe the easing cycle is near its end, as inflation in the Eurozone has fallen close to the ECB’s 2% target and wage pressures show signs of cooling. President Christine Lagarde is likely to stress a data-dependent approach, leaving the door open for adjustments if economic conditions deteriorate.

Beyond monetary policy, broader European risks are adding another layer of pressure on the common currency. In France, the appointment of Sébastien Lecornu as Prime Minister has done little to calm political unrest, with “Block Everything” protests erupting across the country in response to budget cuts and rising fiscal tensions. Meanwhile, Poland has invoked NATO’s Article IV, requesting urgent consultations with allies after Russian drones violated its airspace, heightening geopolitical risks on Europe’s eastern flank.

On the UK side, focus is already shifting toward a busy run of domestic releases before the Bank of England’s (BoE) monetary policy decision next week. Friday’s calendar brings July figures for Gross Domestic Product (GDP), Industrial Production, and Manufacturing Production, which will provide a timely gauge of underlying growth momentum. A stronger set of numbers would reinforce expectations that the BoE can afford to hold rates steady for longer, while weak data could highlight the trade-off between sticky inflation and slowing output.

The BoE, which cut rates by 25 basis points in August, is widely expected to pause at 4.0% at its September meeting. Policymakers continue to face a delicate balancing act, with core services inflation proving persistent even as business surveys point to softer hiring and weaker demand.

Economic Indicator

ECB Main Refinancing Operations Rate

One of the three key interest rates set by the European Central Bank (ECB), the main refinancing operations rate is the interest rate the ECB charges to banks for one-week long loans. It is announced by the European Central Bank at its eight scheduled annual meetings. If the ECB expects inflation to rise, it will increase its interest rates to bring it back down to its 2% target. This tends to be bullish for the Euro (EUR), since it attracts more foreign capital inflows. Likewise, if the ECB sees inflation falling it may cut the main refinancing operations rate to encourage banks to borrow and lend more, in the hope of driving economic growth. This tends to weaken the Euro as it reduces its attractiveness as a place for investors to park capital.