EUR/GBP rises above 0.8800 as UK fiscal, inflation concerns weigh

• The Euro advances as investors expect the ECB to keep interest rates unchanged on Thursday.
• A sharp slowdown in UK shop inflation weighs on the Pound Sterling.
• Expectations of higher UK taxes and potential BoE rate cuts keep the GBP under pressure.

EUR/GBP rises by 0.30% on Wednesday, trading around 0.8805 at the time of writing, reaching its highest level since May 2024. The pair benefits from renewed demand for the Euro (EUR) as investors brace for the European Central Bank (ECB) policy decision due Thursday. The ECB is expected to keep interest rates unchanged for the third consecutive meeting, as inflation remains contained and the Eurozone economy shows signs of stabilization.

Markets are now pricing in about an 80% chance of a first rate cut in 2026, a shift from September when the ECB's hawkish comments had ruled out such a scenario, according to Reuters. ECB President Christine Lagarde's remarks at the post-meeting press conference will be closely watched for any hints on the future policy path. Any hawkish tone could lend short-term support to the single currency.

However, lingering political uncertainty in France continues to weigh on sentiment toward the Euro, following Standard & Poor's downgrade of the country's sovereign rating, citing fragile public finances. Eurozone data remain mixed as Spain's Gross Domestic Product (GDP) slowed to 0.6% in the third quarter, while retail consumption eased to 4.2% YoY.

On the UK side, the Pound Sterling (GBP) remains under pressure due to soft inflation figures and the prospect of an Autumn Budget marked by tax increases. According to a Citi report, the Labour government may raise dividend and consumption taxes to fill a £35 billion fiscal gap.

Money markets are now pricing in a 25-basis-point rate cut by the Bank of England (BoE) as early as the November meeting, a forecast supported by Goldman Sachs. However, a Reuters poll shows that most economists still expect the BoE to hold rates steady until the first quarter of 2026.

Persistently weak productivity and renewed concerns over the sustainability of UK public finances are adding pressure on the Pound Sterling, allowing EUR/GBP to maintain a bullish bias ahead of the key ECB policy decision.

EUR/GBP weekly chart. Source: FXStreet.