EUR/GBP dips as Eurozone growth slows, BoE rate cut odds drop

EUR/GBP trades around 0.8680 on Friday at the time of writing, losing 0.10% on the day as investors assess contrasting economic outlooks in the Eurozone and the United Kingdom (UK).

In the Eurozone, the latest data confirmed that economic growth remained modest in the fourth quarter. Gross Domestic Product (GDP) expanded by 0.2% QoQ in the fourth quarter, below the earlier estimate of 0.3% and slightly lower than the 0.3% growth recorded in the third quarter. On an annual basis, growth came in at 1.2%, also revised down from the preliminary estimate.

Despite easing inflation and lower interest rates, the Eurozone economy continues to face several headwinds, including trade tensions linked to United States (US) tariffs on European imports. For the full year 2025, economic growth still reached 1.4%, marking an acceleration compared with the 0.9% recorded in 2024.

Meanwhile, the Accounts of the latest European Central Bank (ECB) meeting showed that policymakers discussed the outlook for inflation in the Eurozone, noting that inflation could potentially fall further below the central bank’s 2% target.

However, the meeting took place before the escalation of geopolitical tensions between the US and Iran. The conflict could alter the global economic outlook, particularly for Europe, which relies heavily on energy imports.

In the United Kingdom, expectations for monetary policy have shifted in recent days. Rising energy prices linked to the Middle East war are increasing the risk of additional inflationary pressures, reducing the likelihood of a near-term rate cut by the Bank of England (BoE). According to Reuters, analysts at Capital Economics now believe that a rate cut at the March 19 meeting is unlikely unless tensions in the region ease quickly.

The latest fiscal projections published in the Spring Statement delivered by Chancellor Rachel Reeves also highlight a more uncertain economic outlook. The Office for Budget Responsibility (OBR) lowered its forecast for UK growth this year to 1.1%, down from the 1.4% projected in November, while warning that the Middle East war could have significant consequences for both the global and UK economies.

Against this backdrop, markets have sharply adjusted their expectations for the Bank of England’s policy path. Investors now price only around a 20% chance of a rate cut in March, down from roughly 75% a week ago, with just a single 25-basis-point reduction expected over the course of the year.

"Ahead of the Middle East crisis, a March 19 BoE rate cut had been widely expected by the market, with further easing looking likely later in the year. Currently, the market is priced for just one more 25 bp BoE rate cut this cycle on a 6-month view, while market expectations for a rate cut this month have fallen sharply", notes Rabobank’s Senior FX Strategist Jane Foley.