The EUR/GBP exchange rate is stable around 0.8735 during the European session on Friday. Concerns about possible UK tax increases and a potential interest rate cut from the Bank of England (BoE) may put pressure on the Pound Sterling. Investors are also awaiting the Eurozone’s updated report on third-quarter GDP growth.

BoE December Rate Cut Expectations

The UK’s Autumn budget and signs of a weakening economy suggest that the BoE may cut rates in December. The central bank is expected to reduce interest rates by 25 basis points to 3.75% on December 18, due to a cooling job market. This move could weaken the GBP and strengthen the EUR/GBP. In contrast, the European Central Bank (ECB) kept its key rates steady in October at a 2.00% deposit rate. The next monetary policy meeting will be on December 18. Market analysts expect rates to remain unchanged, and the likelihood of rate cuts in 2026 has decreased. These expectations for steady rates from the ECB may help support the EUR against the GBP in the short term. Analysts believe the deposit rate will stay at 2.0% unless inflation drops significantly. Alternatively, a 25 basis point rate hike could happen by the end of 2026 due to inflation pressures. There is a clear divide between the Bank of England and the European Central Bank. While the EUR/GBP pair is peaceful around 0.8735, the upcoming meetings on December 18 are the main focus. This difference in monetary policy could lead to significant market movements in the coming weeks. The market is leaning heavily toward a BoE rate cut this month, which would likely weaken the Pound. Recent data backs this up, with the Office for National Statistics reporting UK inflation dropped to 2.1% in November, bringing it closer to the BoE’s target. This allows the central bank to ease its policy to support a slowing economy.

ECB Policy Stance and Euro Support

On the other hand, the Euro is gaining support as the ECB is projected to keep interest rates steady. Eurostat’s flash estimate for November shows inflation remains stubborn at 2.8%, well above the ECB’s 2% target. This makes it unlikely for the ECB to consider rate cuts anytime soon. For derivatives traders, this suggests strategies that could benefit from a rise in EUR/GBP. Buying call options that expire after the December 18 meetings could capture a potential increase while managing risk. Implied volatility may be high due to the event risk, but the trend appears strong. We’ve seen similar situations before when major central banks diverge in their policy. For example, the policy differences between the US Federal Reserve and the ECB from 2022 to 2023 created a strong multi-month trend in EUR/USD. This historical context suggests the current setup in EUR/GBP could have lasting momentum if central banks act as expected. Create your live VT Markets account and start trading now.

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