The EUR/GBP pair has risen for two days in a row after the Bank of England (BoE) signaled a more cautious approach. BoE policymaker Swati Dhingra shared worries about high interest rates affecting investment and productivity in the UK. Following her remarks, the Euro strengthened against the British Pound in light trading. Currently, EUR/GBP is trading around the 0.8700 level, bouncing back from an earlier decline. There is growing interest in upcoming data releases, like the UK GfK Consumer Confidence index and the Eurozone’s PMIs, to assess economic trends as we head into late 2025.

UK Inflation Data

Recent UK inflation data revealed that general inflation stands at 3.8%, which is lower than expected. This, along with Dhingra’s concerns, raises the possibility that the BoE might cut interest rates by the end of the year, with the market estimating a 75% chance for a rate cut in December. Moreover, the UK is facing budget challenges, with a £30 billion fiscal gap expected. Chancellor Rachel Reeves is likely to discuss this in the upcoming budget in November, potentially considering tax increases or spending reductions, which could negatively impact growth and the Pound. On the currency side, the British Pound showed mixed results, performing best against the Japanese Yen while falling against other major currencies. This indicates a cautious trading mood in the market. The British Pound is feeling pressure, and this trend is likely to continue in the coming weeks. With the recent UK inflation data for September 2025 showing a lower-than-expected 3.8%, the case for a BoE interest rate cut grows stronger. Dhingra’s comments reinforced this view, leading markets to price in a 75% likelihood of a December rate cut.

Monetary Policy Divergence

The difference in monetary policy is crucial here. The European Central Bank (ECB) appears to be easing more slowly, owing to relatively stable core inflation, which was last reported at 2.6% in the Euro area. Additionally, the latest UK GDP data shows a significant slowdown, with third-quarter growth for 2025 just 0.1%. Traders may want to brace for further strengthening of EUR/GBP as economic data increasingly favors the Euro. In the derivatives market, the negative outlook for the Pound is becoming more evident. Implied volatility for GBP currency pairs is rising, particularly for options expiring after the late November budget announcement. We’re also seeing an increase in premium for options that hedge against a decline in the Pound as traders adopt a defensive stance. It’s important to remember the sharp market reaction to the UK’s fiscal missteps in September 2022, which serves as a reminder. With a potential £30 billion fiscal gap, any signs of major tax hikes or spending cuts from Chancellor Reeves’ budget on November 29 could lead to a similar loss of confidence. This history makes the market very sensitive to the upcoming fiscal statement. Given the current situation, strategies that capitalize on a rising EUR/GBP exchange rate are recommended. Buying EUR/GBP call options expiring in January 2026 can help profit from ongoing Pound weakness while limiting potential losses. We’re paying close attention to the 0.8700 level as critical support, with hopes of reaching the 0.8850 area in the weeks ahead. However, we should keep an eye on the upcoming preliminary PMI and retail sales data for the UK and Eurozone. Any unexpectedly strong economic reports from the UK could give the Pound a temporary boost and challenge the current bearish perspective. These figures will be pivotal before we fully focus on the November budget. Create your live VT Markets account and start trading now.

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