EUR/GBP trades flat above 0.8700 amid BoE rate cut speculation

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EUR/GBP flat lines around 0.8735 in Friday’s early European session.
Signs of a slowing UK economy and rising bets of BoE interest rate cuts could drag the GBP lower.
Money markets indicate a high probability that the ECB will keep interest rates unchanged in December.

The EUR/GBP cross trades on a flat note near 0.8735 during the early European session on Friday. Concerns over UK tax hikes and a dovish stance from the Bank of England (BoE) could exert downward pressure on the Pound Sterling. Traders will take more cues from the third estimate of the Q3 Gross Domestic Product (GDP) Growth Rate from the Eurozone later on Friday.

Signs of a weakening UK economy and the UK Autumn November budget have reinforced bets for a December rate cut from the BoE. UK Prime Minister Keir Starmer emphasized the need to bring inflation and interest rates down to boost business investment and economic growth. The UK central bank is expected to cut its interest rates by 25 bps to 3.75% in the monetary policy announcement on December 18 amid a cooling UK job market. This, in turn, could undermine the GBP and create a tailwind for the cross.

The European Central Bank (ECB) left its key interest rates unchanged at the October meeting, with the deposit rate at 2.00%. The next monetary policy meeting is scheduled for December 18. Financial markets project that rates will be kept on hold at the upcoming policy meeting and have significantly reduced expectations for cuts in 2026.

Rising expectations that the ECB is done cutting interest rates could underpin the EUR against the GBP in the near term. Goldman Sachs analysts anticipate the deposit rate will stay at 2.0% throughout 2026 unless inflation significantly decreases. Meanwhile, Deutsche Bank economists see a probability of a 25 basis point (bps) rate hike by the end of 2026, citing inflationary pressure.

Euro FAQs

What is the Euro?

The Euro is the currency for the 20 European Union countries that belong to the Eurozone. It is the second most heavily traded currency in the world behind the US Dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily turnover of over $2.2 trillion a day. EUR/USD is the most heavily traded currency pair in the world, accounting for an estimated 30% off all transactions, followed by EUR/JPY (4%), EUR/GBP (3%) and EUR/AUD (2%).

What is the ECB and how does it impact the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is the raising or lowering of interest rates. Relatively high interest rates – or the expectation of higher rates – will usually benefit the Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

How does inflation data impact the value of the Euro?

Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is an important econometric for the Euro. If inflation rises more than expected, especially if above the ECB’s 2% target, it obliges the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to its counterparts will usually benefit the Euro, as it makes the region more attractive as a place for global investors to park their money.

How does economic data influence the value of the Euro?

Data releases gauge the health of the economy and can impact on the Euro. Indicators such as GDP, Manufacturing and Services PMIs, employment, and consumer sentiment surveys can all influence the direction of the single currency. A strong economy is good for the Euro. Not only does it attract more foreign investment but it may encourage the ECB to put up interest rates, which will directly strengthen the Euro. Otherwise, if economic data is weak, the Euro is likely to fall. Economic data for the four largest economies in the euro area (Germany, France, Italy and Spain) are especially significant, as they account for 75% of the Eurozone’s economy.

How does the Trade Balance impact the Euro?

Another significant data release for the Euro 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 then its currency will gain in value 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.