EUR/GBP fell as the Pound Sterling strengthened after a cautious update from the Bank of England (BoE). The BoE plans to slowly lower interest rates, but significant cuts are limited now that rates are almost neutral.

BoE’s Rate Decision

The BoE recently cut the policy rate by 25 basis points to 3.75%, decided by a narrow 5–4 vote due to ongoing inflation worries. Although inflation is cooling, it still exceeds the BoE’s 2% target. The UK’s GDP grew by 0.1% in the third quarter, in line with expectations, but flat growth is expected for the next quarter. In Europe, the Euro may receive support as signs indicate the European Central Bank (ECB) has completed its cycle of rate cuts. The ECB is likely to keep interest rates steady, with a possible rate cut anticipated for February 2026. ECB President Christine Lagarde emphasized a data-focused approach amid high uncertainty. Central banks set interest rates, which affect costs for loans and investments. Higher rates can boost a currency and raise the opportunity cost of holding assets like Gold that don’t earn interest. The Federal Reserve sets the Fed funds rate, which influences US banks’ overnight lending rates. As of December 29, 2025, the strength of the Pound against the Euro is an important trend to watch. The EUR/GBP pair is under pressure below the 0.8750 mark due to differing outlooks from the central banks, suggesting that strategies favoring a stronger Pound should be explored in the coming weeks.

Impact of the Bank of England’s Policy

The BoE’s recent policy decision is shaping this trend. They cut rates to 3.75% earlier this month, but the close 5-4 vote and cautious tone show hesitance to make further cuts. UK inflation for November 2025 was officially reported at 3.2%, well above the 2% target, limiting the BoE’s ability to act aggressively and supporting the Pound. Conversely, the ECB seems to have stopped its rate cuts, which should help stabilize the Euro. Eurozone inflation data for November 2025 was lower at 2.4%, giving the ECB a reason to hold rates steady for now. This provides a floor for the EUR/GBP pair, but the upside potential appears limited. For derivative traders, this situation suggests selling volatility, as both central banks are likely to hold steady until new data emerges. Selling short-dated EUR/GBP strangles—where one sells an out-of-the-money call and put option—could be a good strategy to collect premium. This would benefit from the expectation that the pair will stay within a defined range in early 2026. With the outlook looking lower for the pair, we should consider positioning for more downside. Data from the CFTC ending December 23, 2025, showed that speculators increased their net short positions on EUR/GBP. This means buying put options or setting up bearish risk reversals may align with the current market momentum. Looking ahead, we must get ready for more price volatility around key data releases in January 2026, especially the upcoming inflation reports. One-month implied volatility for EUR/GBP has already risen to 6.2%, up from a low of 5.5% last month, indicating that the market is preparing for movement. Any signs of persistent UK inflation or weaker Eurozone growth would reinforce the current trend. Create your live VT Markets account and start trading now.

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