EUR/GBP is trading flat near 0.8735 during the early European session on Friday. Concerns over a tax hike in the UK and a dovish stance from the Bank of England could put downward pressure on the British pound. Traders will take further cues from the third estimate of the euro zone’s third-quarter GDP growth rate later on Friday.
Signs of weakness in the UK economy and the UK’s autumn November budget have boosted bets on a December interest rate cut from the Bank of England. British Prime Minister Keir Starmer stressed the need to reduce inflation and interest rates to boost business investment and economic growth. The British central bank is expected to cut interest rates by 25 basis points to 3.75% in its monetary policy announcement on December 18 amid a slowdown in the UK labor market. This, in turn, could undermine the pound and create tailwinds for the pair.
The European Central Bank (ECB) kept key interest rates unchanged at its October meeting, with the deposit rate at 2.00%. The next monetary policy meeting is scheduled for December 18. Financial markets expect interest rates to be kept unchanged at the next policy meeting and have significantly lowered expectations for cuts in 2026.
Growing expectations that the European Central Bank has finished cutting interest rates could support the euro against the pound in the near term. Goldman Sachs analysts expect the deposit rate to remain at 2.0% throughout 2026 unless inflation declines significantly. Meanwhile, economists at Deutsche Bank see the possibility of a 25 basis point hike in interest rates by the end of 2026, citing inflationary pressures.
Frequently asked questions about the euro
The euro is the official currency of the twenty European Union countries that belong to the eurozone. It is the second most traded currency in the world after the US dollar. In 2022, it accounted for 31% of all foreign exchange transactions, with an average daily trading volume of more than $2.2 trillion per day. The EUR/USD is the most widely traded currency pair in the world, accounting for a 30% discount on all transactions, followed by EUR/JPY (4%), EUR/GBP (3%), and EUR/AUD (2%).
The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the euro area. The European Central Bank sets interest rates and manages monetary policy. The ECB’s primary mandate is to maintain price stability, which means either controlling inflation or stimulating growth. Its primary tool is to raise or lower interest rates. Relatively high interest rates – or the expectation of higher interest rates – usually benefit the euro and vice versa. The ECB’s Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by the heads of the eurozone’s national banks and the six permanent members, including the President of the European Central Bank, Christine Lagarde.
Eurozone inflation data, measured by the Harmonized Index of Consumer Prices (HICP), is one of the important economic indicators for the euro. If inflation rises beyond expected, especially if it is above the ECB’s 2% target, this forces the ECB to raise interest rates to bring it back under control. Relatively high interest rates compared to their counterparts usually benefit the euro, because they make the region more attractive as a place for global investors to park their money.
Data releases measure the health of the economy and can affect the euro. Indicators such as GDP, manufacturing and services PMIs, employment, and consumer confidence surveys can all influence the direction of the single currency. A strong economy is good for the euro. Not only does it attract more foreign investment, it may encourage the European Central Bank to raise interest rates, which will directly strengthen the euro. Otherwise, if economic data is weak, the euro will likely fall. Economic data for the four largest Eurozone economies (Germany, France, Italy and Spain) are of particular interest, as they represent 75% of the Eurozone economy.
Another important data for the Euro is the trade balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports during a certain period. If a country produces highly desirable exports, its currency will gain value from the additional demand generated by foreign buyers seeking to purchase these goods. Therefore, a positive net trade balance strengthens the currency and vice versa for a negative balance.
