The Euro has gained value as the European Central Bank (ECB) is likely to keep interest rates steady, which is affecting the EUR/GBP exchange rate. The Pound Sterling is under pressure as UK shop inflation decreases, alongside worries about potential tax hikes and possible interest rate cuts from the Bank of England. On Wednesday, the EUR/GBP rose by 0.30%, reaching its highest point since May 2024, trading around 0.8805. Demand for the Euro has increased with the anticipation of the ECB’s decision. While interest rates are expected to remain stable, there’s an 80% chance that rates could be cut by 2026, marking a change from earlier forecasts.

Eurozone Influences

Political uncertainty in France, highlighted by Standard & Poor’s downgrading its credit rating, is affecting the Euro. Mixed data from the Eurozone shows Spain’s GDP growth slowed to 0.6% in the third quarter, and retail spending fell to 4.2% year over year. In the UK, the Pound Sterling is struggling due to lower inflation figures and expected tax increases in the upcoming Autumn Budget. Predictions indicate that the Bank of England might reduce rates by 25 basis points in November, though most economists believe rates will remain stable until early 2026. Concerns about low productivity and public finances are also weighing on the Pound. In the coming weeks, the main driver for the EUR/GBP exchange rate will likely be the widening gap between the policies of the central banks. The ECB is expected to keep interest rates steady, while the Bank of England might cut rates as soon as next month. This divergence has caused the currency pair to rise above the important 0.8800 level.

UK Fiscal Anxiety

The Pound’s weakness is reinforced by new data showing UK inflation is decreasing quickly. For example, recent figures from the British Retail Consortium revealed that shop price inflation has dropped to a three-year low of 1.5%, providing a strong reason for the Bank of England to consider easing its policy. Financial markets are now pricing in more than a 70% chance of a rate cut in November. With this positive outlook for EUR/GBP, we recommend purchasing call options for EUR/GBP with expirations in December 2025 or January 2026. This strategy allows us to take advantage of a potential rise in the exchange rate while keeping our risk limited to the premium paid. Our initial target is near the 0.8900 level, a price we haven’t seen consistently since early 2023. The current concerns about UK finances remind us of the market’s reaction during the “mini-budget” crisis in autumn 2022, which briefly pushed the exchange rate above 0.9200. While we don’t expect such a dramatic shift, it shows how sensitive the Pound is to fears about government spending. Significant tax increases in the upcoming Autumn Budget could easily lead to another upward move. Conversely, the Euro is finding support from signs of economic stabilization. The latest HCOB Eurozone Composite PMI rose to 50.9, indicating modest growth and supporting the ECB’s steady approach. While political uncertainty in France remains a risk, the more pressing issue is the Pound’s weakness. Create your live VT Markets account and start trading now.

here to set up a live account on VT Markets now