Euro Drifts Higher Against British Pound On Hawkish ECB Signals

The EUR/GBP cross trades with mild gains near 0.8650 during the early European trading hours on Wednesday. Hawkish comments from the European Central Bank (ECB) policymakers provide some support to the Euro (EUR) against the British Pound (GBP). 

Top ECB officials lay groundwork for June rate hike. Francois Villeroy de Galhau said on Tuesday that the central bank “will do what is necessary” to keep inflation on target. Meanwhile, ECB board member Isabel Schnabel stated that the central bank should raise interest rates in June, even if ongoing peace talks with Iran yield a deal, as the conflict has been far longer than projected and high energy prices are spilling into the broader economy. 

Financial markets have fully priced in two hikes in the ECB's 2% deposit rate and see a nearly 50% probability of a third move over the next year. Economists are more cautious and see just two rates rise, followed by a cut in mid-2027, a Reuters poll showed.

On the UK’s front, markets have scaled back imminent expectations for a rate hike following softer inflation data, an unexpected rise in the Unemployment Rate to 5.0% for April, and easing political concerns.  

“Traders now price one rate hike fewer in 2026 than at the end of the previous week, and gilt yields saw the biggest weekly drop since late-2023,” Pantheon Macroeconomics said in a note on Tuesday. “We estimate that lower yields were driven by lower oil prices, a fall in betting-market odds on Sir Keir Starmer being replaced, and Andy Burnham committing to maintain current fiscal rules,” they added.