EUR/GBP weakens below 0.8750 as BoE hints at slower easing pace
- EUR/GBP softens to near 0.8725 in Wednesday’s early European session.
- The BoE’s cautious stance, which signaled that the pace of future cuts may slow, boosts the Pound Sterling.
- Declining expectations that the ECB will cut interest rates in February 2026 might cap the downside for the cross.
The EUR/GBP cross trades in negative territory for the fifth consecutive day around 0.8725 during the early European session on Wednesday. The Pound Sterling (GBP) edges higher against the Euro (EUR) after the Bank of England (BoE) delivered a widely anticipated rate cut while indicating that the bar for further reduction was high due to persistent inflation.
The BoE’s Monetary Policy Committee decided to cut a quarter point in its benchmark interest rate to 3.75% last week, the first cut since last August. Governor Andrew Bailey said during the press conference that rates are likely to continue on a gradual downward path, but "how much further we go becomes a closer call" with each cut.
Money markets believe the BoE will deliver at least one rate cut in the first half of the year and are pricing in nearly a 50% probability of a second before the year-end, according to Reuters. Expectations that the UK central bank will follow a gradual monetary easing path in 2026 could provide some support to the GBP and act as a headwind for the cross in the near term.
The European Central Bank (ECB) left its three key interest rates unchanged at its December policy meeting. The decision was unanimous and marks the fourth consecutive meeting where rates have been held steady. ECB President Christine Lagarde said the bank remains in a “good position” and emphasized that there is consensus within the Governing Council to keep all options open, including the possibility of raising rates if necessary.
The money markets have priced in a 25-basis-point interest rate cut by the ECB in February 2026 and currently remain below 10%. Signals that the ECB rate cut cycle is ending might help limit the EUR’s losses.
Pound Sterling FAQs
The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).
The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.
Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.
Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.
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