On Tuesday, the Euro fell against the British Pound due to strong UK labor market data supporting Sterling. The EUR/GBP exchange rate dropped nearly 0.25%, settling at around 0.8763 after a three-day increase. UK labor data for October showed easing conditions but steady wage growth. Average Earnings Excluding Bonuses rose by 4.6%, just below previous figures but above expectations. Average Earnings Including Bonuses increased by 4.7%, also surpassing predictions. Employment decreased by 17,000, and the ILO Unemployment Rate increased to 5.1%.

Bank of England Interest Rate Cut

The Bank of England is likely to cut interest rates by 25 basis points this Thursday. In December, UK business activity grew, with the Composite PMI Output Index rising to 52.1. The Services PMI also reached 52.1, while the Manufacturing PMI climbed to 51.2. In the Eurozone, weaker PMI data put pressure on the Euro. The Composite PMI Output Index fell to a three-month low of 51.9 in December. Both services and manufacturing sectors declined, with the Manufacturing PMI hitting its lowest point in ten months. Attention is now on upcoming central bank meetings and inflation data from the UK and Eurozone. The ECB is expected to keep interest rates unchanged at its meeting on Thursday. As of December 16th, 2025, the Pound has gained strength against the Euro, pushing the EUR/GBP exchange rate down to around 0.8763. This is supported by UK labor data, showing continued wage growth even as the job market slows. In contrast, the Eurozone is facing some economic challenges.

Economic Divergence Between the UK and Eurozone

The differences in economic performance between the UK and Eurozone are becoming more pronounced. The latest UK PMI data indicated a rise in business activity to a two-month high. Meanwhile, the Eurozone’s equivalent figure fell to a three-month low, largely due to a prolonged decline in manufacturing. Statistics from Germany’s Federal Statistical Office, Destatis, confirmed a 0.4% drop in industrial production for October 2025, raising concerns about the health of the largest economy in the bloc. This week’s central bank meetings are the main focus, with the Bank of England (BoE) and European Central Bank (ECB) announcing decisions on Thursday. Following last week’s UK inflation report, which showed the annual CPI rate for November 2025 dropping to 2.4%, the market is fully expecting a 25 basis point rate cut from the BoE. Historically, the initial rate cut in the 2008 easing cycle led to volatility, but the market is currently focused on the differing economic outlooks. Given this context, we anticipate continued weakness in EUR/GBP over the coming weeks. The options market reflects this sentiment, as one-month risk reversals show rising premiums for EUR/GBP puts. This indicates that traders are willing to pay more to bet on or protect against a decline in this exchange rate, suggesting that strategies benefiting from a lower EUR/GBP are becoming increasingly popular. Before the central bank meetings, we will closely monitor Wednesday’s inflation reports, especially the final Eurozone HICP figures. Although the ECB is expected to keep interest rates steady, any surprise in the inflation data could change expectations for their policy direction in early 2026. The guidance from both the BoE and ECB on Thursday will be crucial in confirming the trend of Sterling outperforming the Euro. Create your live VT Markets account and start trading now.

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