The EUR/GBP fell to around 0.8720 during the early European session on Wednesday. This decline is due to the Bank of England’s cautious approach to future monetary policy, which supports the Pound Sterling against the Euro. Trading volumes are expected to be low as the New Year holidays approach.

Interest Rate Changes

In December, the Bank of England (BoE) lowered interest rates from 4.0% to 3.75%, the lowest point in nearly three years. Governor Andrew Bailey indicated that any further rate cuts will be slow, citing the challenges that come with each reduction. Markets expect the BoE to make at least one rate cut in the first half of the year, with a 50% chance of another cut by the end of the year. On the other hand, the European Central Bank (ECB) has kept rates steady and prefers a “meeting-by-meeting” approach without a fixed plan. Geopolitical tensions in Ukraine are also putting pressure on the Euro. Russia has accused Ukraine of launching a drone attack on a Russian site, complicating efforts for peace. Ukraine has denied these claims, asserting that Russia is finding false justifications for further military action. As the year comes to a close, the EUR/GBP exchange rate is around 0.8720. The main factor influencing this is the widening gap between the Bank of England and the European Central Bank’s tones. This suggests that traders may be preparing for continued strength of the Sterling against the Euro in the coming year.

BoE and ECB Approaches

The BoE’s recent cut to 3.75% was anticipated, but their cautious outlook for future cuts took many by surprise. This sentiment aligns with the latest UK inflation data from November 2025, which showed core inflation stubbornly at 3.1%, far above the bank’s 2% target. As a result, traders may consider buying put options on EUR/GBP, expecting the BoE to be slow in making aggressive rate cuts in the first quarter of 2026. In contrast, the ECB appears to be holding its ground, with some economists predicting no changes through 2026. This position is reasonable given that the Eurozone’s GDP growth for Q3 2025 registered a sluggish 0.1%, and recent data showed a surprising drop in German manufacturing orders for November. This clear divergence, not seen since the rate-hiking cycle began in 2023, reinforces the case for selling EUR/GBP futures contracts. We should keep in mind that trading volumes are low as we approach the New Year, which can lead to sudden and unpredictable shifts in the market. Given this limited liquidity, using options to manage risk may be a safer strategy than taking open-ended futures positions. Market conditions reflect this, with implied volatility for one-month EUR/GBP options rising to a two-month high of 7.2% this week. The ongoing geopolitical uncertainty in Ukraine adds another layer of risk that weighs on the Euro. Increased drone-related incidents could push investors to seek safety in currencies outside the Eurozone. This provides another reason for traders to favor the Pound over the Euro in the upcoming weeks. Create your live VT Markets account and start trading now.

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