- Pound (GBP) is steady after 3 days of gains
- BoE is expected to cut rates at a slower pace
- Euro (EUR) is steady at a 2.5 year low
- ECB rate decision is on Thursday
The Pound Euro (GBP/EUR) exchange rate is falling after three days of gains. The pair rose 0.40% in the previous session, settling on Tuesday at €1.2127. It traded in a range between €1.2070 and €1.2140. At 12:00 UTC, GBP/EUR trades -0.07% at €1.2123.
Sterling trades around its strongest level against the euro in 2.5 years, boosted by hawkish Bank of England expectations and amid the ongoing political uncertainty in France and Germany.
The Bank of England will likely keep interest rates on hold at next week’s meeting as the central bank moves more slowly than the ECB and the Federal Reserve.
The Bank of England is cautious regarding price pressures following the new government’s budget, which policymakers have hailed as inflationary. The Bank of England lifted its inflation forecasts following Rachel Reeves’ announcement.
The market is pricing in just one in 10 chance that the Bank of England will reduce rates from the 4.75% level on December 19th.
Last week, Bank of England governor Andrew Bailey noted a recent slowdown in price growth but also said inflation still had some way to go. It will likely hover above the central bank’s 2% target until 2027.
Meanwhile, the ECB is expected to cut interest rates by 25 basis points in tomorrow’s meeting, although some market participants consider the central bank willing to do so by 50 basis points.
The economic outlook in the region is deteriorating, with recent PMI data showing business activity at a 10-month low. Meanwhile, the political picture is also uncertain, with elections expected in France and Germany.
While investors are betting the Bank of England will cut interest rates only three times between now and the end of 2025, the ECB is forecast to cut rates by a total of 150 basis points between now and the end of next year.