EUR/GBP FALLS TOWARD 0.8550 AHEAD OF ECB POLICY DECISION

• EUR/GBP drops to 0.8550 as Euro drops amid caution ahead of the ECB’s policy decision.
• The ECB is expected to keep the key lending rate at 4.5%.
• The Pound Sterling strengths on UK’s stubborn inflation outlook.

The EUR/GBP pair slumps toward 0.8550 in the European session on Thursday amid uncertainty ahead of the European Central Bank's (ECB) interest rate decision, which will be announced at 13:15 GMT.

The ECB is widely anticipated to keep its Main Refinancing Operations Rate unchanged at 4.5% for the fourth time in a row and the Rate on Deposit Facility at 4%.

While an unchanged interest rate decision from the ECB is widely anticipated, investors would like to know when the central bank will start reducing key lending rates. In an interview with Bloomberg in January on the sidelines of the World Economic Forum (WEF) Annual Meeting in Davos, ECB President Christine Lagarde commented that rate cuts are likely by the Summer. However, she warned that risks of premature rate cuts would be higher than holding them for longer at their current level.

ECB Lagarde might reiterate that rate cuts are likely after getting evidence that inflation will return to the 2% target. Lagarde is expected to warn that some inflation indicators are still higher than the level the central bank wants to see them. The uncertainty over inflation remains high as the slowdown in wage growth is lower than the level, which should be consistent with achieving price stability.

In the shared continent, the Pound Sterling strengthens on sticky United Kingdom’s inflation outlook, allowing the Bank of England (BoE) to keep interest rates higher for longer than other central banks in the Group of Seven (G-7) economies. The EUR/GBP pair will be guided by action in the Euro as the UK economic calendar is light this week.