GBP/EUR rich heading into BoE

Sterling is presently trading at its best against the Euro since August of 2025, despite the fact that a BoE hold tomorrow has been priced into GBPEUR since at least the last week of January. Bets of the year end BoE rate have climbed, but only by a modest 2.5bps, suggesting more is at play behind the general Sterling rally.

I continue to expect the Bank of England to surprise to the downside regarding rates, with tertiary data suggesting continuing softness within the UK economy, especially surrounding employment data. The S&P UK services report today printed the 10^th month in a row of below 50 on the employment index, the longest such run since early 2010. At the same time, Eurozone unemployment dropped in December, down to 6.2%, the lowest since the founding of the Euro in 1999.

Moreover, the resolution of the two-year French budget debacle that saw off two Prime Ministers has seen the yield of French bonds decline, whilst UK Gilt yields continue to trip upwards and trade at a premium.

Looking ahead, with the market so strongly expecting a 7-2 (hold-cut) vote from the BoE and a likely hawkish statement to follow, anything short of this will likely rout the Pound. This is somewhat in conflict with what Monetary Policy Committee members have been saying recently and the official inflation estimates from the bank, which see inflation declining to 3% by the end of Q1.

The ECB on the other hand as acres of space to make decisions, with Deutsche Bank coming out today to give their estimate of no change in the European base rate this year. The potential for a hawkish BoE surprise is significantly slimmer than the chance of a more dovish slant.