UK GDP Expectations
UK GDP data for Q3 is predicted to display 0.1% quarterly growth and 1.3% annual growth. Should these figures underperform expectations, the GBP might weaken against the EUR.
The Pound Sterling is the United Kingdom’s official currency, with trading figures reaching an average of $630 billion daily in 2022. Influences on its value include monetary policy by the Bank of England, economic data releases, and the trade balance, while key trading pairs include GBP/USD, GBP/JPY, and EUR/GBP.
We are seeing the EUR/GBP pair soften below 0.8750, but we shouldn’t lose sight of the bigger picture. The Bank of England is cutting rates while the European Central Bank remains on hold, creating a clear policy divergence. This fundamental split should favor the Euro over the Pound in the coming weeks.
The immediate focus is the UK Q3 GDP release later today, with expectations for a modest 0.1% quarterly growth. We recall the near-recessionary environment of 2024, which makes any deviation from this forecast significant. This uncertainty is likely reflected in elevated short-term implied volatility for EUR/GBP options.
Monetary Policy Divergence
We believe the BoE’s rate cuts, bringing the rate down to 3.75%, are a direct response to the rapid fall in inflation we saw throughout 2024, when the headline rate dropped from over 4% to near the 2% target. This contrasts with the Eurozone, where inflation proved stickier, giving the ECB reason to pause. The market has priced in these cuts, but any future weakness will accelerate the trend.
Therefore, we see the current softness in EUR/GBP as a potential entry point for strategies that profit from a rising pair. Any strength in the Pound, possibly from a better-than-expected GDP print, could be short-lived against the backdrop of monetary easing. We would consider using dips towards the 0.8700 level to position for a move back towards the 0.8850 resistance seen earlier this year.
We must also watch for signs that the UK economy is bottoming out, which would challenge this outlook. The BoE’s own upgraded growth forecast for 2025 to 1.5% is a key risk factor that could limit further rate cuts. This suggests using options strategies that cap potential losses might be prudent if entering long positions now.
