EUR/GBP declines as BoE and ECB divergence, French political risks weigh

• The EUR/GBP pair trims recent gains after three consecutive days of advance.
• Divergent expectations between the BoE and the ECB keep traders cautious.
• Political uncertainty in France and the upcoming ECB decision on Thursday weigh on sentiment.

EUR/GBP retreats on Monday, ending a three-day winning streak, and trades around 0.8725 at the time of writing, down 0.15% for the day. The pair remains just below the 0.8750 resistance area, a one-month high reached on Friday.

Expectations for further easing by the Bank of England (BoE), together with concerns over the United Kingdom's (UK) fiscal outlook ahead of the November Autumn Budget, continue to weigh on the British Pound (GBP). Markets are now pricing in a higher chance of a 25-basis-point rate cut in November after inflation in the UK held steady in September and the labour market showed further signs of cooling.

This outlook contrasts sharply with that of the European Central Bank (ECB), whose policymakers have signalled that the easing cycle is likely over. Rate futures now imply only a slim chance of an additional cut by the end of 2026, supporting the rate differential in favour of the Euro (EUR) and helping limit the downside for EUR/GBP.

However, political uncertainty in France curbs the appetite for the single currency. Socialist Party leader Olivier Faure has threatened to topple Prime Minister Sébastien Lecornu's government if his party's budget demands are not met, while Moody's Ratings revised France's outlook to "negative," citing the risks of political deadlock and a persistently high fiscal deficit.

On the macroeconomic front, the release of the German IFO Business Climate Index at 88.4 in October, beating expectations of 87.8, provided marginal support to the Euro. While business expectations in Germany have slightly improved, market participants prefer to wait for Thursday's ECB policy decision before taking fresh directional positions on the EUR.