• EUR/GBP trades flat near 0.8660 in thin liquidity after Wednesday’s pullback.
• ECB officials flag risks from Euro strength as markets reassess rate-cut expectations.
• Focus turns to Eurozone GDP and jobs data.

The Euro (EUR) holds firm against the British Pound (GBP) on Thursday, stabilising after coming under pressure in the previous session amid rising speculation that the European Central Bank (ECB) could cut interest rates later this year. At the time of writing, EUR/GBP is trading flat around the 0.8660 mark in thin liquidity conditions.

Speculation around a potential ECB rate cut has been fuelled by the Euro’s recent strength against the US Dollar (USD), attracting fresh attention from policymakers.

Austrian central bank Governor Martin Kocher said this week that a persistently stronger Euro could eventually force policymakers to respond. “If the euro appreciates further and further, at some stage this might create, of course, a certain necessity to react in terms of monetary policy,” Kocher noted, adding that this would not be about targeting the exchange rate itself, “but because the exchange rate translates into less inflation, and then this is of course a monetary policy issue.”

ECB Governing Council member François Villeroy de Galhau echoed those remarks, saying the central bank is “closely monitoring this appreciation of the euro and its possible consequences in terms of lower inflation,” adding that it is “one of the factors that will guide our monetary policy and our decisions on interest rates over the coming months.”

Overnight Index Swaps now show a modest rise in easing bets, with markets pricing in about a 26% chance of a rate cut by the September meeting, up from around 16% before the comments. However, the ECB is still widely expected to keep policy unchanged at its next meeting on February 4-5.

On the data front, the Euro found some support from generally firmer Eurozone sentiment figures. The Business Climate indicator improved to -0.41 in January from -0.56 in December. The Economic Sentiment Indicator rose to 99.4, beating expectations and improving from 97.2, while Consumer Confidence held steady at -12.4, in line with forecasts.

On the UK side, investors remain cautious ahead of the Bank of England’s (BoE) policy meeting scheduled for February 5, where the central bank is widely expected to keep interest rates unchanged at 3.75% following recent firmer-than-expected inflation data.

Looking ahead, the focus in the Eurozone will turn to Friday’s releases of preliminary fourth-quarter GDP figures and the Unemployment Rate.