EUR/GBP softens below 0.8850 despite growing expectations of BoE rate cut

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The EUR/GBP cross loses momentum to near 0.8820 during the early European session on Thursday. Nonetheless, the potential downside for the cross might be limited, as weakening UK economic data have increased expectations for a Bank of England (BoE) interest rate cut in December.

EUR/GBP edges lower to around 0.8820 in Thursday’s early European session.
Analysts expect the Bank to cut rates in December, given the recent inflation data and a softening jobs market.
ECB set to leave rates unchanged through 2026 on a steady economic outlook, noted a Reuters poll.

Recent weak UK economic data, such as Consumer Price Index (CPI) inflation, disappointing GDP and Industrial Production readings, have boosted BoE rate cut bets in the December meeting. The Office for National Statistics (ONS) revealed on Wednesday that the UK headline inflation fell to 3.6% YoY in October, as expected, from 3.8% in September.

Additionally, uncertainty and pessimism surrounding the UK's autumn budget could weaken sentiment towards the Pound Sterling against the Euro. The upcoming government budget on November 26 is also expected to influence the BoE's next move.

While the BoE is facing pressure to reduce the interest rates, the European Central Bank (ECB) maintains a more cautious stance, which provides some support to the EUR. According to a majority of economists polled by Reuters, the ECB will hold interest rates at least until the end of 2026. The case for a longer pause has increased since the ECB last reduced the key interest rates in June, with inflation hovering around the 2% target, GDP stable, and the unemployment rate staying at an all-time low.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

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