The Bank of England has surprisingly shifted to a friendlier policy, hinting that interest rate cuts might be coming soon. This change has affected how the market feels, suggesting there’s a chance for the pound to weaken. Traders dealing in derivatives should expect more ups and downs in the market and anticipate a lower pound in the short term.
This move marks a big change from last year, when the central bank adopted a tough, hawkish stance. Right now, overnight index swaps indicate a 75% chance of a 0.25% rate cut by the March meeting. This expectation gained traction after last week’s inflation report, which showed the Consumer Price Index (CPI) dropping to 2.1%, easing pressure on the central bank.
In the coming weeks, traders should keep an eye on the EUR/GBP currency pair. We see strong support forming around 0.8670/80, which could be a good spot to start long positions. Strategies like buying EUR/GBP call options could be a smart way to profit from the expected weakness of the pound.
We expect EUR/GBP to rise toward the 0.8800 level over the next month. Political pressure on the Starmer government to address the rising cost of living is increasing, making a rate cut seem more likely. This situation favors trades that benefit from a strengthening EUR/GBP exchange rate.
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