Key Moments
- EUR/GBP traded around 0.8785 in early European dealings on Thursday, with the Euro outperforming the Pound.
- Markets fully priced in a Bank of England rate cut to 3.75% on Thursday, following weaker-than-expected UK inflation data.
- The European Central Bank was expected to keep its key policy rate unchanged, as conviction grew that rate cuts have ended.
EUR/GBP Strengthens Ahead of Central Bank Announcements
EUR/GBP rose to 0.8785 during the early European session on Thursday. The cross gained support from Pound weakness versus the Euro. This shift followed softer UK inflation data and rising expectations of a BoE rate cut, while investors awaited announcements from both the BoE and ECB.
The BoE was expected to lower its benchmark rate to 3.75%. Meanwhile, markets anticipated that the ECB would keep rates unchanged, since recent data did not signal a need for adjustment.
UK Inflation Misses Expectations, Pressuring the Pound
ONS data on Wednesday showed UK headline CPI rose 3.2% year-on-year in November, down from 3.6% in October. This figure was below the 3.5% forecast. Core CPI increased 3.2%, missing the 3.4% expectation.
As a result, expectations for BoE policy easing strengthened. Futures reflected a near 100% probability of a quarter-point cut on Thursday, with higher chances of further reductions in 2026. Consequently, GBP remained under pressure against the Euro.
ECB Seen on Hold as Markets Reassess Policy Path
By contrast, the ECB was widely expected to hold policy rates steady in December. The key deposit rate has remained at 2% since July. This view suggested near-term support for the Euro versus the Pound.
Comments from ECB officials Isabel Schnabel and Philip Lane spurred speculation of a possible rate hike next year. However, a Reuters poll indicated most economists expect rates to stay unchanged through 2026 and 2027, though projections range from 1.5%-2.5%.
| Central Bank | Current/Recent Policy Signal | Market Expectations |
|---|---|---|
| Bank of England (BoE) | Rate cut to 3.75% on Thursday | Nearly 100% chance of a quarter-point cut and higher probability of multiple cuts in 2026 |
| European Central Bank (ECB) | Key deposit rate at 2% since July | Policy rates expected to remain unchanged through 2026 and 2027 |
⚠️ BoE Day: Watch language around balanced risks & cautious policy stance. Expect this to soften given weak jobs/pay, 5 consecutive soft-ish CPI reports & fiscal tightening knocking 0.5ppts off inflation (per Dep Gov). Language tweak may put Feb cut in play… at least 50:50 $GBP pic.twitter.com/8dnUGYDRwz
— Viraj Patel (@VPatelFX) December 18, 2025
Bank of England Framework and Implications for Sterling
The BoE sets UK monetary policy to maintain a 2% inflation target. It influences borrowing costs by adjusting the base lending rate for banks, which affects broader interest rates and GBP valuation.
When inflation exceeds the 2% target, the BoE raises rates to make borrowing more expensive, supporting GBP by attracting global investors. Conversely, when inflation falls below target and growth slows, the BoE may cut rates to encourage investment, which tends to weaken GBP.
Quantitative Easing and Quantitative Tightening Explained
In severe economic stress, the BoE can use Quantitative Easing (QE) to expand credit. Under QE, it buys government or AAA-rated bonds from banks. This generally leads to a weaker Pound when rate cuts alone are insufficient.
Quantitative Tightening (QT) is the opposite. The BoE stops reinvesting bond repayments and ceases purchases. This policy tends to strengthen GBP when economic conditions improve.
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