The Pound Sterling (GBP) weakened at the start of the week, pushing EUR/GBP closer to 0.8800. With slowing UK growth, softening inflation, and easing labor market conditions, markets anticipate a Bank of England (BoE) rate cut this week, though Wednesday’s CPI release remains the final potential obstacle, MUFG's FX analyst Derek Halpenny reports.

UK inflation and growth trends support further BoE easing

"The pound has weakened alongside the US dollar at the start of this week resulting EUR/GBP rising back up closer to the 0.8800-level after hitting a low of 0.8721 on 9th December. We expect the pound to weaken further as the BoE moves to lower rates this week. The relief rally for the pound after last month’s Budget appears to have run its course now."

"The recent softening of UK inflation, weaker growth and loosening of labour market conditions has provided justification for another BoE rate cut this week, and should be sufficient to encourage at least key swing voter Governor Bailey to shift in favour of a vote for another cut this week."

"The last potential banana skin for BoE rate cut expectations will be the release tomorrow of the UK CPI report for November. A significant upside inflation surprise would be required to derail a  rate cut this week given slowing economic growth and loosening labour market conditions in the UK."