EUR/GBP holds firm as ECB decision contrasts with UK economic challenges

• The Euro holds firm near 0.8800 after the European Central Bank keeps rates unchanged.
• Germany's inflation slows to 2.3% in October, slightly above expectations.
• The Pound Sterling stays under pressure amid weak UK productivity forecasts and a dovish BoE outlook.

The EUR/GBP pair trades around 0.8800 on Thursday at the time of writing, consolidating near its highest level since May 2023, after the European Central Bank (ECB) decided to leave interest rates unchanged. The Euro (EUR) remains supported by solid growth data in the Eurozone, while the Pound Sterling (GBP) continues to struggle amid a weakening domestic outlook.

The ECB maintained its main refinancing rate at 2.15%, the marginal lending facility at 2.4%, and the deposit facility at 2%, as widely expected. In its statement, the Governing Council noted that inflation remains close to its 2% medium-term target and that its assessment of the price outlook is broadly unchanged. The central bank also highlighted the resilience of the Eurozone economy, supported by a robust labor market and the lagged effects of previous rate cuts.

However, ECB President Christine Lagarde acknowledged during her press conference that the outlook remains uncertain, citing geopolitical tensions and global trade disputes as key risks. Lagarde noted that underlying inflation remains consistent with the 2% target while wage growth continues to moderate. She said that long-term inflation expectations remain close to the target, although the outlook is more uncertain than usual.

The European Central Bank President also pointed out that some downside risks to growth have eased thanks to progress in trade negotiations and a calmer situation in the Middle East, but she still cited Russia's war against Ukraine as a major source of uncertainty. Finally, Lagarde warned that a stronger Euro could further dampen inflation, while higher defense spending might add upward pressure on prices, reaffirming that the ECB will remain data-dependent and not pre-commit to any rate path.

Earlier in the day, preliminary data from Germany showed that annual Consumer Price Index (CPI) inflation slowed to 2.3% in October from 2.4% in September, slightly above expectations of 2.2%. The Harmonized Index of Consumer Prices (HICP), the ECB's preferred inflation measure, also slowed to 2.3% YoY.

In the United Kingdom, the Pound Sterling remains under pressure after reports that the Office for Budget Responsibility (OBR) has revised its productivity growth forecasts lower by 0.3%, potentially widening the fiscal gap by £20 billion. This revision, ahead of the Autumn Budget due on November 26, reinforces expectations of monetary easing by the Bank of England (BoE). Markets are currently pricing a 68% chance of a 25-basis-point rate cut in December, while some analysts, including Goldman Sachs, see the first cut as early as next week.