EUR/GBP stays below 0.8750 as eyes focus on ECB, BoE outlook
- EUR/GBP weakens as the Pound Sterling strengthens on a cautious BoE policy outlook.
- The BoE is expected to ease gradually but sees limited room for further cuts near neutral rates.
- The Euro could find support as signals suggest the ECB’s rate-cutting cycle has ended.
EUR/GBP inches lower after registering gains in the previous session, trading around 0.8720 during the early European hours on Monday. The currency cross depreciates as the Pound Sterling (GBP) gains on a cautious tone surrounding the Bank of England’s (BoE) policy outlook.
BoE Governor Andrew Bailey signaled that interest rates are expected to ease further in a gradual manner, but cautioned that the scope for additional cuts is limited as rates approach their neutral level. Any moves beyond the latest cut are likely to be finely balanced and strongly driven by incoming data.
The BoE lowered the policy rate by 25 bpp to 3.75% in December, with a close 5–4 vote highlighting persistent inflation concerns. While inflation cooled to 3.2% in November, it remains well above the BoE’s 2% target. UK GDP expanded by 0.1% in the third quarter, meeting expectations, but the BoE projects flat growth in the final quarter.
However, the EUR/GBP cross could gain ground as the Euro (EUR) may receive support from signals that the European Central Bank (ECB) rate cut cycle has ended. Traders expect the European Central Bank (ECB) to hold interest rates steady for some time. The money markets have priced in a 25 bps interest rate cut by the ECB in February 2026, currently remaining below 10%.
ECB President Christine Lagarde noted that the central bank cannot provide forward guidance on future rate moves due to high uncertainty, emphasizing a data-dependent, meeting-by-meeting approach.
Interest rates FAQs
Interest rates are charged by financial institutions on loans to borrowers and are paid as interest to savers and depositors. They are influenced by base lending rates, which are set by central banks in response to changes in the economy. Central banks normally have a mandate to ensure price stability, which in most cases means targeting a core inflation rate of around 2%. If inflation falls below target the central bank may cut base lending rates, with a view to stimulating lending and boosting the economy. If inflation rises substantially above 2% it normally results in the central bank raising base lending rates in an attempt to lower inflation.
Higher interest rates generally help strengthen a country’s currency as they make it a more attractive place for global investors to park their money.
Higher interest rates overall weigh on the price of Gold because they increase the opportunity cost of holding Gold instead of investing in an interest-bearing asset or placing cash in the bank. If interest rates are high that usually pushes up the price of the US Dollar (USD), and since Gold is priced in Dollars, this has the effect of lowering the price of Gold.
The Fed funds rate is the overnight rate at which US banks lend to each other. It is the oft-quoted headline rate set by the Federal Reserve at its FOMC meetings. It is set as a range, for example 4.75%-5.00%, though the upper limit (in that case 5.00%) is the quoted figure. Market expectations for future Fed funds rate are tracked by the CME FedWatch tool, which shapes how many financial markets behave in anticipation of future Federal Reserve monetary policy decisions.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
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