BoE rate cut speculation drags sterling

The EURGBP currency cross flat lines near 0.8810 during the early European session on Tuesday. Nonetheless, recent weak UK gross domestic product (GDP) data has pressured the Bank of England to potentially cut rates, which might drag the pound sterling lower against the euro.

The UK Consumer Price Index (CPI) and Producer Price Index (PPI) reports will be the highlights later on Wednesday.

Market pricing suggests a high probability that the BoE will reduce the interest rate to 3.75% in December due to subdued GDP growth and a gradually loosening labour market, while wage growth continued to slow. Recent data showed that the UK Unemployment Rate rose to 5%, its highest since early 2021.

Though market sentiment favours a December rate cut, the decision will depend on incoming economic data, including the upcoming Autumn Budget and inflation figures.

The headline UK CPI is expected to show a rise of 3.6% YoY in October, while the core CPI is projected to show an increase of 3.4% YoY during the same period. A surprise upside for UK inflation data could boost the GBP and create a headwind for the cross in the near term.

The European Central Bank has kept its key interest rates unchanged since June, with traders expecting this pause to last into the next year. The cautious stance of the ECB could provide some support to the EUR against the GBP.

According to a Reuters report from September, analysts anticipate that the ECB’s rate-cutting cycle will end amid a stable economic outlook.

(Source: OANDA)