UK GDP Expectations

UK GDP data for Q3 is expected to show a quarterly growth of 0.1% and an annual growth of 1.3%. If these numbers are below expectations, the GBP could weaken against the EUR. The Pound Sterling is the UK’s official currency, with an average trading volume of $630 billion daily in 2022. Its value is influenced by the Bank of England’s monetary policy, economic data releases, and the trade balance. Major trading pairs include GBP/USD, GBP/JPY, and EUR/GBP. Currently, the EUR/GBP pair is dipping below 0.8750. However, we should keep the bigger picture in mind. The Bank of England is cutting rates while the European Central Bank is holding steady, leading to a clear difference in policy. This divergence is likely to benefit the Euro over the Pound in the next few weeks. Today, all eyes are on the UK Q3 GDP data, anticipating modest quarterly growth of 0.1%. Given the near-recession conditions of 2024, any change from this forecast is important. This uncertainty may be causing higher short-term implied volatility for EUR/GBP options.

Monetary Policy Divergence

We think the BoE’s rate cuts, lowering the rate to 3.75%, are a direct response to the sharp decline in inflation throughout 2024, when it fell from over 4% to nearly the 2% target. In contrast, inflation in the Eurozone has been more stubborn, leading the ECB to hold its rates steady. The market has already anticipated these cuts, but any future weakness may speed up the trend. Thus, we view the current decline in EUR/GBP as a good opportunity for strategies that benefit from a stronger pair. If the Pound strengthens, perhaps due to a better-than-expected GDP report, that strength may be short-lived given the monetary easing. We might look to enter positions around the 0.8700 level to target a move back toward the previous resistance of 0.8850 seen earlier this year. We also need to stay alert for signs that the UK economy might be stabilizing, which could change this outlook. The BoE’s upgraded growth forecast for 2025 at 1.5% is a significant factor that may limit further rate cuts. This suggests that using options strategies to limit potential losses could be wise if entering long positions now. Create your live VT Markets account and start trading now.

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