Deutsche Bank forecasts that Europe’s main central banks will take different actions soon. They expect the Bank of England (BoE) to cut rates, while the European Central Bank (ECB) is likely done with rate cuts for now. Deutsche Bank predicts the BoE will lower the Bank Rate by 25 basis points to 4.00% in its next meeting. This will be the fifth rate cut in this cycle. The change is due to easier financial conditions as inflation cools and domestic demand decreases.

The ECB Forecast

Deutsche Bank has changed its outlook for the eurozone. They no longer expect the ECB to lower rates further. This shift is influenced by clarity around the EU-U.S. trade deal and recent strong statements from ECB officials. The different expectations for the BoE and ECB might impact the EUR/GBP exchange rate. A rate cut from the BoE could weaken the pound, while the ECB’s steady approach could strengthen the euro, especially if eurozone data supports this. In the short term, EUR/GBP might rise, but any increases may be limited if market concerns about potential rate cuts from Frankfurt linger later this year. We see a split between the Bank of England (BoE) and the European Central Bank (ECB) in the near term. The BoE is likely to cut interest rates again this week, while the ECB may have finished its easing cycle. This difference is crucial for traders to monitor.

Impact on Currency Exchange

The anticipated BoE cut to 4.00% this Thursday is expected, marking the fifth cut in this cycle. Recent data backs this move, with the UK’s July CPI at 2.1% and retail sales down 0.5%. This indicates slowing domestic demand and cooling inflation. On the other hand, the ECB is expected to keep rates steady, marking the end of its easing phase. The Eurozone’s Composite PMI for July rose to 51.2, showing four months of economic growth and resilience. This, along with a more positive tone from officials after the recent EU-U.S. trade agreement, supports the decision to pause. We have seen this type of policy divergence before, especially after the 2016 Brexit referendum. Historical trends show that different economic outlooks between these banks can lead to long-term currency pair trends. When the two central banks move in opposite directions, it often has a notable effect on exchange rates. For derivative traders, this indicates an opportunity to bet on a stronger euro against the pound in the coming weeks. The most straightforward approach is to expect the EUR/GBP exchange rate to rise. A BoE rate cut should pressure the pound, while a stable ECB could support the euro. A practical strategy could involve buying call options on EUR/GBP to benefit from the expected increase. This allows traders to take advantage of potential price movements while limiting their risk to the premium paid. This is particularly relevant with the BoE decision happening soon, which could trigger the price move. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now