Insights 
VT 
The Euro has risen as the European Central Bank is expected to keep interest rates unchanged, impacting the EUR/GBP exchange rate. A sharp decline in UK shop inflation is affecting the Pound Sterling, alongside fears of higher taxes and possible Bank of England rate cuts.
On Wednesday, EUR/GBP increased by 0.30%, reaching its peak since May 2024, trading around 0.8805. The anticipation of the ECB’s policy decision has increased demand for the Euro. Despite projections of stable interest rates, future changes are expected, with an 80% chance of a rate cut in 2026 now being considered, a shift from earlier predictions.
Eurozone Influences
Political uncertainty in France, evidenced by Standard & Poor’s downgrading the sovereign rating, is influencing the Euro. Eurozone data reveals mixed results, with Spain’s GDP growth slowing to 0.6% in the third quarter and retail consumption falling to 4.2% YoY.
In the UK, the Pound Sterling remains pressured by weaker inflation figures and anticipated tax increases in the Autumn Budget. Market predictions suggest the Bank of England might cut rates by 25 basis points by November, but the majority of economists expect rate stability until early 2026. Weak productivity and concerns over public finances further challenge the Pound.
We see the primary driver for EUR/GBP in the coming weeks as the widening gap between central bank policies. The European Central Bank is expected to hold interest rates steady, while the Bank of England may be forced to cut rates as soon as next month. This divergence is the main reason the currency pair has broken above the key 0.8800 level.
UK Fiscal Anxiety
The weakness in the Pound is supported by fresh statistics showing UK inflation is cooling rapidly. Recent data from the British Retail Consortium, for instance, showed shop price inflation falling to a three-year low of 1.5%, giving the Bank of England a clear reason to consider easing policy. Overnight Index Swaps are now pricing in a greater than 70% probability of a rate cut in November.
Given this bullish outlook for the pair, we should consider buying EUR/GBP call options with expiries in December 2025 or January 2026. This strategy allows us to benefit from a continued rise in the exchange rate while limiting our risk to the premium paid. We see initial targets near the 0.8900 level, a price point not consistently seen since early 2023.
The current UK fiscal anxiety reminds us of the market reaction during the “mini-budget” crisis back in autumn 2022, which briefly pushed the pair above 0.9200. While such a dramatic move is not our base case, it highlights how sensitive the pound is to concerns about government finances. An upcoming Autumn Budget with significant tax increases could easily accelerate the move higher.
On the other side of the trade, the Euro is finding support from signs of economic stabilization, with the latest HCOB Eurozone Composite PMI rising to 50.9 and indicating modest growth. This helps justify the ECB’s steady stance. Although political uncertainty in France is a background risk, the more immediate and powerful story is the weakness of the pound.
