• The Euro retreats against the British Pound after EUR/GBP briefly touches its highest level in more than a week.
• The ECB holds interest rates steady and warns that energy inflation could keep price pressures above target through early 2027.
• Traders fully price in a September ECB rate hike, while the UK's fiscal uncertainty limits demand for the Pound.

The Euro (EUR) trades under pressure against the British Pound (GBP) as traders assess the European Central Bank’s (ECB) latest monetary policy announcement.

At the time of writing, EUR/GBP trades around 0.8530 after hitting an intraday high of 0.8544, its highest level in more than a week.

The ECB left its three key interest rates unchanged, with the deposit facility rate, main refinancing operations rate and marginal lending facility rate held at 2.25%, 2.40% and 2.65%, respectively, after delivering a 25-basis-point hike in June.

In its monetary policy statement, the Governing Council reaffirmed its commitment to ensuring that inflation stabilises at the 2% medium-term target. However, it warned that uncertainty remains high and that the full inflationary impact of the energy shock has yet to emerge.

The ECB said it is closely monitoring the intensity and duration of the shock, as well as any indirect and second-round effects. It reiterated that future interest-rate decisions will depend on its assessment of the inflation outlook and the risks surrounding it.

Speaking after the decision, ECB President Christine Lagarde said that energy inflation is likely to keep headline inflation well above the ECB’s target through the first half of 2027 before easing. She noted that “risks to growth are tilted to the downside,” while “risks to inflation are tilted to the upside,” adding that the Middle East conflict is “a major source of uncertainty.”

With tensions in the Middle East escalating again and triggering a strong rebound in Oil prices, inflation could accelerate after easing in June, keeping the prospect of another ECB rate hike on the table. Traders are now fully pricing in a rate increase at the September meeting.

Meanwhile, markets have also increased their bets on a Bank of England (BoE) rate hike as inflation pressures persist. However, the British Pound is drawing little support as markets focus on the evolving political backdrop under the new Prime Minister and uncertainty surrounding the government’s fiscal plans.