EUR/GBP gathers strength above 0.8750, all eyes on ECB and BoE rate decicions

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EUR/GBP gains traction to around 0.8785 in Thursday’s early European session.
BoE is set to cut rates to 3.75% on Thursday.
ECB is expected to keep rates on hold, as recent economic data has not pointed to an adjustment.

The EUR/GBP cross gathers strength to near 0.8785 during the early European session on Thursday. The Pound Sterling (GBP) weakens against the Euro (EUR) on softer-than-expected UK inflation data and firming Bank of England (BoE) rate cut bets. All eyes will be on the BoE and the European Central Bank (ECB) interest rate decisions later on Thursday.

The UK headline Consumer Price Index (CPI) increased 3.2% YoY in November, compared to a rise of 3.6% in October, according to the Office for National Statistics (ONS) on Wednesday. This figure came in softer than the 3.5% expected. Meanwhile, the core CPI, excluding volatile food and energy items, rose 3.2% YoY in the same period, compared to the previous reading and market consensus of 3.4%.

The GBP remains on the defensive against the EUR as interest rate futures priced in a near 100% probability of a quarter-point rate cut at its December meeting on Thursday and a higher chance of multiple rate cuts in 2026.

On the other hand, the ECB is widely expected to keep its policy rates steady at its December policy meeting on Thursday. The central bank has kept its key deposit rate on hold at 2% since July. The growing acceptance that the ECB is done cutting interest rates could provide some support to the EUR against the GBP in the near term.

Remarks from ECB policymakers Isabel Schnabel and Philip Lane have fueled some speculation about a rate hike late next year. However, most economists polled by Reuters expect the ECB to leave rates unchanged through 2026 and 2027, although the forecast range for the latter year was wide at 1.5%-2.5%.

BoE FAQs

What does the Bank of England do and how does it impact the Pound?

The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).

How does the Bank of England’s monetary policy influence Sterling?

When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.

What is Quantitative Easing (QE) and how does it affect the Pound?

In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.

What is Quantitative tightening (QT) and how does it affect the Pound Sterling?

Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.