• EUR/GBP sees modest gains, trading at 0.8562, following ECB’s 25 bps rate hike.
• ECB pushes inflation prospects up, sparking expectations for further rate hikes.
• BoE’s hawkish expectations spark Sterling’s strength, capping the Euro’s rally.

EUR/GBP trades with modest gains after the European Central Bank (ECB) raised rates by 25 basis points (bps) and telegraphed additional increases. However, expectations of further tightening by the Bank of England (BoE) capped the Euro’s (EUR) rally at 0.8591, recovering ground after Wall Street closed. At the time of writing, the EUR/GBP is trading at 0.8562, up 0.13%.

Rate hike prospects for BoE temper Euro’s rise despite ECB’s bold monetary tightening

On Thursday, the European Central Bank (ECB) raised rates by 25 bps as expected, leaving the deposit rates at 2.50%, its highest level in 22 years. Besides increasing rates, the ECB staff revised inflation prospected to the upside, from 4.6% to 5.1%.

In the meantime, ECB President Christine Lagarde cemented the case for a rate hike in July but pushed back against expectations for a September increase. Lagarde added, “Wage pressures, while partly reflecting one-off payments, are becoming an increasingly important source of inflation.”

Even though inflation cooled somewhat, it is still three times the ECB’s goal of  6.1%. It should be said that prices have come down at the expense of slow economic growth, as recent GDP reports from the bloc suggest the economy hit a recession. Back-to-back negative quarters revealed that growth was cut to -0.1% in Q4 2022 and Q1 2023.

Aside from this, expectations for a hawkish Bank of England (BoE) capped the Euro’s gains, which was set to challenge the 0.86 handle. Nevertheless, money market futures estimates for the BoE to raise rates at least 100 bps in the next twelve months spurred an appreciation in the Sterling (GBP), which posted solid gains against the US Dollar.