Insights 
VT 
The UK budget provided a modest lift to the Pound Sterling (GBP) as fiscal pressures eased. The government did not raise taxes as much as expected, aided by the Office for Budget Responsibility’s assessment of a £6bn fiscal gap.
Concerns linger about the credibility of future tax increases, and long-term government spending plans may not appear realistic. The budget is unlikely to majorly affect the BoE cycle, though lower energy prices could slightly boost confidence for rate cuts.
Sterling Rate Outlook
Sterling is not considered cheap on a trade-weighted basis, and three rate cuts by the BoE in the next seven months could push EUR/GBP higher. The EUR/GBP could see demand in the 0.8700/8750 range and move towards 0.8850 before a scheduled BoE rate cut on 18 December.
The recent UK budget gave Sterling a modest and likely temporary lift, primarily due to relief that the fiscal situation wasn’t worse. With the immediate fiscal hole reassessed to just £6 billion, the market’s worst fears were avoided. We believe this strength in the pound is a selling opportunity, not a sign of a sustained turnaround.
Our focus is squarely on the Bank of England (BoE), which is facing mounting pressure to cut rates before year-end. The latest inflation data for October 2025 showed CPI falling to 2.1%, putting it within touching distance of the BoE’s 2% target. This data point significantly increases the probability of a rate cut at the December 18th meeting.
Market Strategy Consideration
The economic backdrop supports this easing bias, as third-quarter GDP figures released last week showed the economy had stalled with 0.0% growth. Furthermore, a 30% drop in UK wholesale natural gas prices since September gives the BoE the cover it needs to act. This combination of slowing inflation and stagnant growth makes a compelling case for lower interest rates.
Derivative traders should consider positioning for a higher EUR/GBP exchange rate over the next three to four weeks. We see the current 0.8700/0.8750 area as a strong support level, making it an attractive entry point for long positions. A move back towards 0.8850 seems likely, and buying EUR call options with a mid-January 2026 expiry would be a direct way to play this anticipated move.
Historically, we have seen this pattern before, such as during the easing cycle that followed the 2016 Brexit vote, where Sterling weakened considerably against the euro. To manage costs, traders could implement a bull call spread on EUR/GBP, which would profit from a rise to our target while limiting the initial premium paid. This strategy offers a defined-risk way to bet on the pound’s expected decline.
