The recent UK budget provided a slight boost to the Pound Sterling (GBP) as fiscal pressures lightened. The government did not increase taxes as much as anticipated, thanks to the Office for Budget Responsibility’s estimate of a £6 billion fiscal gap. However, doubts remain about the reliability of future tax hikes, and long-term government spending plans may seem unrealistic. The budget is unlikely to heavily influence the Bank of England’s (BoE) policies, though lower energy prices could slightly increase hopes for rate cuts.

Sterling Rate Outlook

Currently, Sterling is not considered undervalued on a trade-weighted basis, and three expected rate cuts by the BoE in the next seven months could push the EUR/GBP higher. Demand may emerge in the 0.8700 to 0.8750 range, potentially moving toward 0.8850 before a scheduled BoE rate cut on December 18. The latest UK budget gave Sterling a small and likely short-lived boost, mainly because the fiscal situation wasn’t as dire as feared. With the fiscal gap reassessed at just £6 billion, the market avoided its worst-case scenarios. We see this strength in the pound as a chance to sell, not as a sign of a lasting recovery. Our attention is focused on the BoE, which faces growing pressure to lower rates by the end of the year. The latest inflation report for October 2025 showed the Consumer Price Index (CPI) fell to 2.1%, bringing it close to the BoE’s target of 2%. This data significantly raises the chances of a rate cut in the December 18 meeting.

Market Strategy Consideration

The economic landscape supports a policy easing approach, especially since third-quarter GDP figures released last week showed stagnant growth at 0.0%. Additionally, UK wholesale natural gas prices have dropped by 30% since September, giving the BoE more leeway to act. This mix of slowing inflation and no growth strongly suggests lower interest rates. Traders in derivatives should consider setting up for a higher EUR/GBP exchange rate in the next three to four weeks. The current range of 0.8700 to 0.8750 looks like a solid support level, making it an attractive entry point for long positions. A rebound toward 0.8850 seems likely, and buying EUR call options with a mid-January 2026 expiry would be a direct way to capitalize on this expected movement. Historically, similar trends have occurred before, such as after the 2016 Brexit vote when Sterling weakened significantly against the euro. To manage trading costs, a bull call spread on EUR/GBP could work well, as this would profit from an increase toward our target while keeping initial costs lower. This approach offers a defined-risk opportunity to bet on a decline in the pound. Create your live VT Markets account and start trading now.

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