The EUR/GBP currency pair is holding steady above 0.8800, currently around 0.8810, as we await new data from the Eurozone. In September, Germany’s Industrial Production is expected to rebound by 3% after a previous drop of 4.3%. Additionally, Eurozone Retail Sales are projected to rise by 0.2%, maintaining an annual growth rate of 1%. The European Central Bank (ECB) is likely to proceed cautiously in its next policy meeting, keeping the deposit rate steady at 2.0%. Meanwhile, the Bank of England (BoE) is expected to hold its policy rate at 4% this November, while considering possible rate cuts due to easing inflation and wage data.

UK Fiscal Measures and Monetary Policies

Chancellor Rachel Reeves intends to propose fiscal measures in the upcoming budget to tackle borrowing, which may include tax increases. The BoE’s monetary policies, encompassing interest rate decisions and Quantitative Easing, significantly impact the value of the Pound Sterling. When inflation rises, the BoE uses Quantitative Tightening, which can strengthen the Pound. In the past, the market was closely monitoring the EUR/GBP pair as it remained above 0.8800, focusing on the differing policies of the central banks. Understanding how the ECB and BoE have changed since then is crucial. Back then, the ECB had kept its deposit rate at 2.0% for three consecutive meetings, but it has since taken a different approach. The ECB has raised rates to fight inflation and has started a cautious easing cycle, with the deposit facility rate now at 3.50%. Recent Eurostat data shows that inflation in the Euro Area has decreased to 2.4%, allowing the ECB to think about more cuts. On the other hand, the BoE has faced persistent domestic inflation, leading to a hike in the bank rate from the expected 4.0% to 5.0% in the latest meeting. According to the Office for National Statistics, UK inflation remains high at 3.1%, reinforcing the BoE’s tougher stance compared to the ECB.

Fiscal Pressures and Economic Growth

The fiscal pressures associated with the November 26 budget are still a significant concern for the UK economy. The debt-to-GDP ratio is notably high at 98.5%, which restricts the government’s ability to maneuver financially. This limitation impacts the BoE’s policies and caps long-term growth prospects, which should be considered in our sterling strategies. With the BoE taking a more aggressive approach compared to the dovish ECB, the EUR/GBP pair appears likely to trend lower. To prepare for potential volatility around the upcoming central bank meetings in December, consider using options. Buying put options on EUR/GBP could be an effective strategy to capitalize on further declines resulting from the widening interest rate gap. Create your live VT Markets account and start trading now.

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