Euro weakens against British Pound as inflation data and BoE take centre stage

April 2025 lows remain close for EUR/GBP. The Euro is struggling to regain ground.
The British Pound draws support against the Euro from French fiscal risks and expectations of a BoE rate hike.
Ahead of Thursday’s BoE decision, markets turn to PMI releases and Eurozone inflation data.

EUR/GBP trades around 0.8336 at the time of writing. The cross is down 0.11% on Tuesday, reversing part of the previous day’s modest advance. Monday’s sharp fall in Oil prices had eased pressure on the energy-dependent Eurozone, lending support to the Euro (EUR).

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Following a Wall Street Journal (WSJ) report that Washington conducted limited strikes on Iran’s Qeshm Island, Oil prices have recovered. West Texas Intermediate (WTI) is up 2.45% above $97, after a decline of nearly 7% on Monday. That sell-off came after reports that Iran’s President said the Supreme Leader had given the government greater authority over negotiations.

Elevated fiscal risks in France continue to favour the British Pound (GBP) over the single currency, leaving the Euro close to levels last recorded in April 2025. With few economic releases scheduled for Tuesday, traders are concentrating on Middle East developments and moves in Oil prices.

Wednesday brings the final October Services and Composite Purchasing Managers’ Indexes (PMIs) for both the Eurozone and the United Kingdom. Preliminary Eurozone inflation data will also be in focus.

The data arrive before Thursday’s monetary policy announcement from the Bank of England (BoE). Policymakers are widely expected to raise rates for the first time since 2023, seeking to stop the Middle East energy shock from spreading into wider price pressures.

Expectations of a BoE rate increase provide further backing for Sterling against the Euro. If the rate rises to 4%, its differential with the ECB’s 2.50% deposit rate would expand from 125 bps to 150 basis points (bps).

Near 4% EUR/GBP fall points to consolidation as Sterling outperforms

ING analysts describe Sterling as “trading reasonably well,” citing the market’s assessment that “high energy prices leave the Bank of England no alternative but to hike rates on Thursday.” Other supportive factors are also evident, they say: “upside economic surprises, UK fiscal policy seemingly heading in the right direction and warmer ties with the EU all seem to be helping sterling too.” ING also sees positioning as a source of support, noting that “speculators are still running reasonably large short positions in sterling, which suggests this period of sterling outperformance can continue.”

ING nevertheless sees scope for a pause after the rapid decline, observing that “EUR/GBP has come a long way very quickly – a near 4% drop in a little over a month,” and concluding that “some consolidation is probably due.” The analysts do not yet expect a significant trough. With “high energy prices likely to keep expectations of higher UK policy rates in place until early next year and French budgetary problems unresolved, it is too early to expect a significant low in EUR/GBP.”

BoE: key questions

Bank of England: its role and influence on the Pound

Monetary policy in the United Kingdom is determined by the Bank of England (BoE). The central bank’s main objective is ‘price stability’, meaning a stable inflation rate of 2%. It pursues that objective by adjusting base lending rates. By setting the rate charged on its lending to commercial banks and on lending between banks, the BoE determines interest rate levels across the economy. These decisions also affect the value of the Pound Sterling (GBP).

Interest rates: how BoE policy affects Sterling

Inflation above the Bank of England’s target prompts rate increases, raising borrowing costs for households and businesses. Higher rates support the Pound Sterling by making the UK more attractive to international investors seeking a home for their funds. Conversely, below-target inflation signals slowing economic growth. The BoE will then consider cutting rates to reduce credit costs, hoping to encourage businesses to borrow for investment in projects that generate growth. This is negative for the Pound Sterling.

Quantitative Easing (QE): the mechanism and impact on the Pound

When conditions are extreme, the Bank of England can turn to Quantitative Easing (QE) to substantially expand credit flows through a stalled financial system. This policy is a last resort when interest rate cuts cannot deliver the required outcome. Under QE, the BoE prints money to purchase assets from banks and other financial institutions, typically government bonds or AAA-rated corporate bonds. The Pound Sterling usually weakens as a result.

Quantitative tightening (QT): the process and implications for Sterling

As the economy strengthens and inflation begins to rise, Quantitative tightening (QT) reverses QE. Under QE, the Bank of England (BoE) buys government and corporate bonds from financial institutions to encourage lending. QT instead involves ending further bond purchases and ceasing to reinvest principal repayments as existing bond holdings mature. The policy is generally supportive of the Pound Sterling.