The Pound Sterling gained modest support following a Bank of England message that was less dovish than anticipated. Many decision-makers expressed concern over persistently high wage growth expectations and structurally high inflation.
Projections suggest that these wage expectations could decrease in the New Year as headline inflation lowers. It is anticipated that 25 basis point rate cuts could occur in February and April, as opposed to the market’s expectation of just one cut, potentially keeping EUR/GBP near 0.87.
Bank Of England Concerns
We see that the Bank of England is still concerned about stubbornly high wage growth, which gave the pound some temporary strength. However, the latest data from late November 2025 shows UK headline inflation fell more than expected to 3.1%, a significant drop that signals price pressures are finally easing. This challenges the Bank’s less-dovish stance.
Recent economic figures also point to a slowdown, with November’s retail sales data showing a 0.4% contraction as consumers pull back on spending. This combination of falling inflation and weakening activity strengthens the case for rate cuts sooner than the market anticipates. History shows us that when data turns this way, the BoE is often forced to pivot quickly from its hawkish talk.
Our view remains that rate cuts of 25 basis points are likely in both February and April 2026. Current market pricing has only fully baked in one cut for that period, presenting a clear opportunity for traders. This divergence in expectations should put downward pressure on Sterling over the coming weeks.
Forex Trading Outlook
For those trading foreign exchange, this outlook should continue to provide a floor for the EUR/GBP pair ahead of the 0.8700 level. A more dovish BoE will likely weaken the pound against the euro, causing the pair to drift higher into the new year. We anticipate this level will hold as a strong base of support.
In the derivatives market, this suggests positioning for a weaker pound, especially as we head into January 2026. Buying call options on EUR/GBP with February or March expiries could be a cost-effective way to trade this view. It allows traders to capitalize on a potential upward move while capping their risk if wage data remains unexpectedly hot.
