EUR/GBP is steady at around 0.8785 during the early European session on Tuesday. The market is cautious as it awaits the Eurozone’s preliminary Harmonized Index of Consumer Prices (HICP) release. The UK Autumn budget report has impacted expectations for a rate cut by the Bank of England (BoE) in December. The Chancellor of the Exchequer announced plans to raise taxes by 26 billion pounds by 2029-30. Analysts are predicting that the BoE may cut the rate to 3.75% this month, which could affect the GBP.

Eurozone Monetary Policy

The European Central Bank (ECB) is keeping its interest rate policy unchanged, which supports the Euro. ECB President Christine Lagarde and Governing Council member Joachim Nagel expressed satisfaction with the current monetary policies. The Eurozone HICP report is expected to reveal a 2.1% year-over-year increase for November, with core HICP increasing to 2.5%. If inflation comes in lower than expected, it could exert pressure on the EUR against GBP. The Euro is the currency for 20 Eurozone countries and makes up 31% of global forex transactions. The ECB, based in Frankfurt, manages monetary policy for the Eurozone mainly through interest rates. The ECB’s decisions, along with economic indicators like GDP and trade balance, significantly influence the Euro’s value. In recent weeks, EUR/GBP has traded flat around the 0.8800 level. This reflects a divide between a dovish BoE and a steady ECB, creating clear opportunities as we approach the year’s end.

Derivative Trading Strategy

The expectation of a BoE rate cut this month is strong, especially following last month’s Autumn Budget. Recent data from the Office for National Statistics shows UK inflation dropped to 2.5% in November, marking the fifth consecutive monthly decline. With the economy slowing and inflation near target, the market sees over a 90% chance of a 25-basis-point cut at the December 18th meeting. For derivative traders, this suggests positioning for further weakness in the Pound. It would be wise to consider buying EUR/GBP call options with strike prices around 0.8850 and 0.8900, expiring in late December or January. This strategy helps profit from a potential increase in the currency pair while minimizing downside risk. Meanwhile, the ECB appears firm. The preliminary Eurozone HICP inflation data for November came in at 2.3%, slightly above the expected 2.1%. This persistent inflation supports ECB officials’ statements that interest rates are stable, leaving no reason for cuts anytime soon. This growing gap in policy approaches reinforces the view that the Euro will strengthen against the Pound. The unexpected rise in inflation in Europe suggests that the path of least resistance for EUR/GBP is upward. Thus, short-term forward contracts to buy Euros against the Pound could serve as a solid hedge for those exposed to GBP. Looking back, the move toward 0.8800 marks a significant change from the trading range seen throughout most of 2025. Between April and August, the pair struggled to consistently break above 0.8650. The current fundamental context indicates that this recent strength is part of a new trend rather than a temporary spike. Create your live VT Markets account and start trading now.

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