Sterling Steadies Against Euro Ahead of ECB Rate Decision

The pound was little changed against the euro and the dollar on Thursday as investors waited for an expected European Central Bank interest rate rise. Oil holding above $100 a barrel also limited appetite to take strong positions across markets.

The euro traded at 85.89 pence, little changed on the day. Sterling has traded in a narrow range against the euro for much of the past six weeks, with the single currency largely holding between 85.4 pence and 85.6 pence. Against the dollar, the pound edged up to $1.355.

ECB set to hike, BoE expected to hold

Money markets expect the ECB to raise euro zone rates by a quarter point to 2.5% on Thursday. Another increase is almost fully priced in by the end of this year, with an 80% chance of a third by March.

By contrast, the Bank of England is not expected to raise rates next week. Markets have priced in only two increases between now and March, a path many analysts view as too aggressive, particularly after Governor Andrew Bailey pushed back against such expectations.

US inflation reports due on Thursday and Friday add to the uncertainty. The readings could either reinforce expectations of a Federal Reserve rate increase next week or weaken the case for tighter policy.

UK GDP data due on Friday

UK GDP data for July are due on Friday. Economists polled by Reuters expect the economy to have stalled after growing 0.3% in June, leaving annual growth at 1.2%, up from 1.1% the month before.

Strong growth in the first half of the year has put Britain on track to be one of the G7's fastest-growing economies. However, support from unusually warm weather and the soccer World Cup is likely to fade, posing risks to both the pound and the interest rate outlook, said George Vessey, lead FX and macro strategist at Convera.

"For sterling, that creates an important test. A stronger (GDP) reading would help justify the roughly three rate hikes currently priced by summer 2027. However, any evidence that growth is losing momentum could trigger a dovish reassessment of those expectations, eroding sterling's yield advantage and leaving the pound more vulnerable to downside pressure."

UK inflation and wage growth data are due next week.