The EUR/GBP remains close to 0.8750 as the Bank of England (BoE) lowers rates while the European Central Bank (ECB) keeps theirs steady. The BoE’s rate cut of 25 basis points brings the main interest rate down to 3.75%. This move aligns with market expectations after UK inflation decreased recently. Analysts predict another rate cut might happen in early 2026 due to economic trends. On the other hand, the ECB’s decision to maintain its policy rate meets market expectations. ECB President Christine Lagarde stated that rates will stay unchanged for a long time. Their latest forecast shows stronger economic growth, with inflation expected to reach 2% by 2028, after remaining below this level for the next two years.

Impact of BoE and ECB Policies on Currency

The BoE targets a stable inflation rate of 2% by adjusting base lending rates, which directly affects the value of the Pound Sterling. When rates go up, it usually strengthens the currency by attracting more investment. In contrast, lower rates can negatively impact the currency. In extreme situations, the BoE may use Quantitative Easing to increase credit flow and stimulate the economy, which often weakens the pound. Conversely, Quantitative Tightening, used when inflation rises, typically strengthens the currency. There is a clear division between the Bank of England, which has just cut its rate to 3.75%, and the European Central Bank, which has decided to hold steady. This difference is largely due to recent data showing UK inflation dropped to 2.8% in November 2025, compared to Eurozone inflation at 3.1%. This fundamental difference suggests that the Pound may weaken against the Euro. Given this situation, purchasing call options on the EUR/GBP with expirations in January or February 2026 seems like a smart move in the coming weeks. This strategy allows us to benefit from potential gains in the currency pair while limiting our risk to the premium paid for the options. We believe targeting strike prices around 0.8850 is a good plan, anticipating movement toward the next resistance level.

Market Sentiment and Strategy

This scenario is similar to what occurred after the 2016 Brexit referendum, when a policy divide led to a significant rally in EUR/GBP. All attention is now on today’s UK retail sales figures; a weak report would support the view of a slowing UK economy and likely push the pair higher. Failing to meet the expected -0.4% decline for November would strengthen our long positions. Current market conditions seem ripe for entry, as implied volatility for EUR/GBP options is close to its 12-month low of 5.5%, making options relatively inexpensive. The market has absorbed the shock from the central bank news, providing a chance to prepare for the next move. Create your live VT Markets account and start trading now.

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