The EUR/GBP pair is holding steady around 0.8825 as expectations rise for a rate cut from the Bank of England (BoE). This expectation comes after weak UK GDP data, which showed a 0.1% growth in the third quarter, falling short of the predicted 0.2%. Yearly growth stands at 1.3%. Concerns about the economy and possible interest rate cuts could weaken the Pound Sterling. There is a 79% chance of a 25 basis point rate cut at the BoE’s upcoming meeting on December 18. In contrast, the European Central Bank (ECB) is adopting a cautious approach, which supports the Euro.

Pound Sterling And Monetary Policy

The Pound Sterling is the UK’s currency and ranks as the fourth most traded in the world, accounting for 12% of foreign exchange transactions in 2022. Its value is primarily influenced by the BoE’s monetary policy, which aims to keep inflation at 2%. Key economic data, like GDP and employment figures, can impact the Pound’s strength. The trade balance also plays a significant role. A positive trade balance boosts the Pound due to increased foreign demand, while a negative balance weakens it. Understanding these economic indicators is essential for predicting the future movement of the Pound Sterling. Currently, there’s a noticeable difference between the Bank of England and the European Central Bank. The BoE is under pressure to lower interest rates to support the slowing UK economy, while the ECB is maintaining a steady course. This situation creates a fundamental weakness for the Pound against the Euro.

The Case for a Weaker Pound

The argument for a weaker Pound is gaining strength. The disappointing Q3 GDP growth of only 0.1% and the recent consumer price index from October showing a decline to 2.1%—just under the BoE’s target—suggest that the central bank may cut rates. Markets now expect a 79% chance of a rate cut at the meeting on December 18. Meanwhile, the Eurozone shows more resilience. The latest flash composite PMI for November has risen to 50.8, signaling slight economic growth for the third consecutive month. This aligns with the ECB’s recent statements indicating no need for interest rate adjustments, making the Euro more appealing compared to the Pound at this time. For traders in derivatives, this trend suggests strategies that could profit from a rising EUR/GBP exchange rate. Buying call options expiring after the December 18 BoE meeting could capitalize on the anticipated rate cut, allowing profit from potential upward movement while limiting risk. We can look back to the market trends before the Brexit vote in 2016 for a historical example. During that time of uncertainty, expectations of a looser BoE policy caused the EUR/GBP pair to rise sharply from around 0.76 to over 0.83. A similar divergence in policy is occurring now, indicating further potential gains for the pair from its current level near 0.8825. Create your live VT Markets account and start trading now.

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