Euro slips against British Pound with inflation data and BoE in focus
- EUR/GBP remains near April 2025 lows as the Euro struggles to recover.
- France’s fiscal risks and BoE interest rate hike expectations support the British Pound against the Euro.
- PMI and Eurozone inflation figures come into focus ahead of Thursday’s BoE decision.
EUR/GBP edges lower on Tuesday after posting modest gains the previous day, when a sharp decline in Oil prices offered some relief to the energy-dependent Eurozone and supported the Euro (EUR). At the time of writing, the cross trades around 0.8336, down 0.11% on the day.
Oil prices rebound after the Wall Street Journal (WSJ) reported that Washington carried out limited strikes on Iran’s Qeshm Island. West Texas Intermediate (WTI) trades above $97, up 2.45%, after losing nearly 7% on Monday. The decline followed reports that Iran’s President said the Supreme Leader had granted the government more authority over negotiations.
The Euro remains near levels last seen in April 2025, as heightened fiscal risks in France keep the British Pound (GBP) favoured against the single currency. A light economic calendar on Tuesday leaves traders focused on Middle East headlines and Oil price movements.
On Wednesday, attention turns to the final October Services and Composite Purchasing Managers’ Indexes (PMIs) from the Eurozone and the United Kingdom, alongside preliminary Eurozone inflation figures.
These releases lead into the Bank of England’s (BoE) monetary policy announcement on Thursday. The BoE is widely expected to deliver its first rate hike since 2023 as policymakers seek to prevent the Middle East energy shock from feeding into broader price pressures.
BoE rate hike expectations also lend support to the British Pound against the Euro. A rise to 4% would widen the gap with the ECB’s 2.50% deposit rate to 150 basis points (bps) from 125 bps.
Sterling outperformance persists as EUR/GBP slide invites consolidation
Analysts at ING note that Sterling is “trading reasonably well,” underpinned by the market’s view that “high energy prices leave the Bank of England no alternative but to hike rates on Thursday.” They add that “upside economic surprises, UK fiscal policy seemingly heading in the right direction and warmer ties with the EU all seem to be helping sterling too.” Positioning is also seen as supportive, with ING highlighting that “speculators are still running reasonably large short positions in sterling, which suggests this period of sterling outperformance can continue.”
Against this backdrop, ING points out that “EUR/GBP has come a long way very quickly – a near 4% drop in a little over a month,” and judges that “some consolidation is probably due.” Even so, they argue that with “high energy prices likely to keep expectations of higher UK policy rates in place until early next year and French budgetary problems unresolved, it is too early to expect a significant low in EUR/GBP.”
BoE FAQs
The Bank of England (BoE) decides monetary policy for the United Kingdom. Its primary goal is to achieve ‘price stability’, or a steady inflation rate of 2%. Its tool for achieving this is via the adjustment of base lending rates. The BoE sets the rate at which it lends to commercial banks and banks lend to each other, determining the level of interest rates in the economy overall. This also impacts the value of the Pound Sterling (GBP).
When inflation is above the Bank of England’s target it responds by raising interest rates, making it more expensive for people and businesses to access credit. This is positive for the Pound Sterling because higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls below target, it is a sign economic growth is slowing, and the BoE will consider lowering interest rates to cheapen credit in the hope businesses will borrow to invest in growth-generating projects – a negative for the Pound Sterling.
In extreme situations, the Bank of England can enact a policy called Quantitative Easing (QE). QE is the process by which the BoE substantially increases the flow of credit in a stuck financial system. QE is a last resort policy when lowering interest rates will not achieve the necessary result. The process of QE involves the BoE printing money to buy assets – usually government or AAA-rated corporate bonds – from banks and other financial institutions. QE usually results in a weaker Pound Sterling.
Quantitative tightening (QT) is the reverse of QE, enacted when the economy is strengthening and inflation starts rising. Whilst in QE the Bank of England (BoE) purchases government and corporate bonds from financial institutions to encourage them to lend; in QT, the BoE stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive for the Pound Sterling.
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