The EUR/GBP cross advanced to approximately 0.8535 during early European trading on Wednesday, buoyed by escalating geopolitical tensions in the Middle East that have reignited inflation concerns and shifted monetary policy expectations.
Markets have increased wagers on further tightening from both the Bank of England (BoE) and the European Central Bank (ECB) after a surge in oil prices. The rally in crude follows the U.S. reimposition of a blockade on Iranian vessels transiting the Strait of Hormuz and additional military strikes by U.S. Central Command against Iranian targets near the strategic waterway. Iran’s Revolutionary Guard Corps retaliated on Wednesday, stating it had struck U.S. Fifth Fleet facilities in Bahrain, according to Reuters.
Traders are now fully pricing in a 25-basis-point rate increase from the BoE by September, with a second hike anticipated before year-end. Similarly, the ECB is expected to deliver a quarter-point hike in September, with a further move considered highly probable, per Bloomberg data.
ECB President Christine Lagarde reiterated that policy remains strictly data-dependent, while the account of the June meeting clarified that the previous hike did not signal a preset course. On Wednesday, Governing Council member Martin Kocher affirmed the central bank’s readiness to implement further monetary measures as warranted. ECB officials Fabio Panetta and Joachim Nagel are scheduled to speak later in the session.
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