EUR/GBP trades slightly lower as BoE supports Pound, ECB steadies Euro

• The EUR/GBP cross trades slightly lower at the start of the week
• Pound Sterling remains supported by expectations of a more gradual easing cycle from the BoE
• The Euro limits the downside from the view that the ECB’s rate-cut cycle is nearing its end

EUR/GBP trades around 0.8715 on Monday at the time of writing, slightly lower for the day. The cross pauses following the previous session’s gains, as the Pound Sterling (GBP) benefits from a cautious yet relatively firm tone surrounding the monetary policy outlook of the Bank of England (BoE).

The British currency is underpinned by recent comments from BoE Governor Andrew Bailey, who indicated that interest rates are expected to ease further in a gradual manner. He nevertheless stressed that the scope for additional cuts is limited as rates approach their neutral level, adding that future moves will be finely balanced and heavily driven by incoming economic data.

The Bank of England lowered its policy rate by 25 basis points to 3.75% in December, following a close five-to-four vote that highlighted persistent inflation concerns. Although inflation in the United Kingdom (UK) cooled to 3.2% in November, it remains well above the central bank’s 2% target. Meanwhile, UK Gross Domestic Product (GDP) expanded by 0.1% in the third quarter, in line with expectations, while the Bank of England projects flat growth in the final quarter of the year.

On the Euro side, downside pressure on EUR/GBP remains limited by signals suggesting that the European Central Bank’s (ECB) rate-cut cycle may have come to an end. The European Central Bank kept interest rates unchanged earlier this month and hinted that they are likely to remain steady for some time. ECB President Christine Lagarde has emphasized that the central bank cannot provide forward guidance on future rate moves amid high uncertainty, reiterating a data-dependent, meeting-by-meeting approach.

Money markets are now pricing in less than a 10% chance of a 25-basis-point rate cut by the European Central Bank in February. This perception of a more stable monetary policy stance in the Eurozone could help limit the Euro’s losses in the near term.

Overall, the Pound Sterling remains broadly firm as investors expect the Bank of England to pursue a moderate easing cycle in 2026, refraining from aggressive rate cuts while inflation in the United Kingdom stays well above target. In the short term, EUR/GBP is likely to trade in a relatively stable manner, with liquidity expected to thin ahead of New Year celebrations.