Euro stands tall against the British Pound despite the risk-off sentiment

The Euro (EUR) consolidated gains, just below three-week highs against the British Pound (GBP) on Tuesday, trading sideways at the mid-range of the 0.8550s at the time of writing. The risk-off mood is weighing on Euro rallies, but GBP bulls are also subdued amid concerns about the UK government’s fiscal policy and caution ahead of the Bank of England’s (BoE) monetary policy meeting, due later this week.

A pause in hostilities between the US and Iran and the ensuing decline in Oil prices is underpinning the common currency, which is also drawing some support from the hawkish stance of last week’s European Central Bank (ECB) monetary policy.

The ECB left interest rates on hold, following a 25-basis-point hike in June, but signalled a further rate hike in September, as high energy prices keep pushing inflationary pressures higher.

BoE seen tolerating 3% inflation as risks stay below second-round threshold

In the UK, the focus this week shifts to the BoE, which is widely expected to leave its benchmark Bank Rate unchanged at 3.75%. Investors will look at the number of hawkish dissenters within the committee, and Governor Bailey's comments at the press conference to confirm market expectations that the bank will hike rates in the last quarter of the year.

Economists at ING are sceptical about that posibility, though, as the Bank of England’s updated projections are set to show inflation running “fairly close to 3% in the second half of this year and into early next,” a level they argue remains comfortably within the Bank’s tolerance. In this context, their base case is that "the Bank stays on hold through 2026,” with policy easing pushed well into the next cycle. ING says it “currently project[s] two rate cuts from the spring of 2027,” but emphasises that this path is “contingent on there being no material fiscal stimulus at the Autumn Budget.”

Beyond that, the Pound has been on the back foot with investors wary about the financing for the new Prime Minister Andy Burnham’s spending pledges. Burnham announced caps on transport fares and electricity bills, triggering market concerns about further strains on public finances, a very sensitive issue in the UK after Liz Truss's fiasco in 2022.