EUR/GBP posts modest gains above 0.8700 amid BoE rate cut outlook

EUR/GBP trades with mild gains around 0.8735 in Tuesday’s early European session.
BoE is widely expected to reduce borrowing costs by 25 bps to 3.75% next week amid weak UK labor market conditions.
German Industrial Production rose more than expected in October.

Lallalit Srijandorn FXStreet

The EUR/GBP cross posts modest gains near 0.8735 during the early European trading hours on Tuesday. The Pound Sterling (GBP) edges higher against the Euro (EUR) amid expectations that the Bank of England (BoE) will cut interest rates in the policy meeting next week.

Concerns over higher overall taxation levels following the announcement of the UK autumn budget, along with softer inflation and a cooling labor market, add weight to the prospect of further BoE policy shifts. This, in turn, could undermine the GBP and act as a tailwind for the cross in the near term. Markets are currently pricing in around a 90% probability of a 25 basis points (bps) cut to 3.75% at the upcoming BoE meeting, which would be the sixth rate cut since August 2024.

The Euro strengthens against the Pound Sterling after the upbeat economic data from Germany and the Eurozone. Germany’s Industrial Production rose by 1.8% MoM in October, compared to an increase of 1.3% prior, according to Destatis on Monday. This figure came in above the market consensus of -0.4%. Meanwhile, the Eurozone’s Sentix Investor Confidence improved to -6.2 in December versus -7.4 prior.

Additionally, growing speculation that the European Central Bank (ECB) is done cutting interest rates could boost the EUR. Financial markets project that rates will be kept on hold at the upcoming policy meeting and have significantly reduced expectations for cuts in 2026. ECB board member Isabel Schnabel said on Monday that she is comfortable with investor bets that the central bank’s next interest-rate move will be an increase.

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.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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