EUR/GBP hits two-year high as Eurozone GDP surprises, Pound under pressure

• The Euro strengthens as Eurozone GDP data beats expectations, while the Pound Sterling remains pressured.
• Germany's economy stalls in Q3, but the bloc grows by 0.2%, reinforcing confidence ahead of the European Central Bank meeting.
• EUR/GBP trades around 0.8810, its highest level since May 2023, as investors anticipate Christine Lagarde's comments.

The EUR/GBP pair trades around 0.8810 on Thursday at the time of writing, up 0.20% on the day and hovering near its highest level in more than two years, as traders brace for the European Central Bank (ECB) monetary policy announcement later in the day. The Euro (EUR) benefits from encouraging Eurozone growth data, while the Pound Sterling (GBP) remains under pressure amid rising expectations of further monetary easing by the Bank of England (BoE).

Earlier in the day, the preliminary Gross Domestic Product (GDP) figures for Germany showed that the economy stalled in the third quarter, in line with forecasts, following a 0.3% contraction in the previous quarter. However, the broader Eurozone economy surprised to the upside, expanding by 0.2% QoQ compared with estimates of 0.1%. On an annualized basis, the major continent expanded at a faster pace of 1.3% against estimates of 1.2%, but slower than the former release of 1.5%.

This solid performance strengthens expectations that the ECB will keep interest rates unchanged for the third consecutive meeting later in the day. The rate on the deposit facility is widely expected to remain at 2.0%, while investors will closely follow ECB President Christine Lagarde's press conference for clues on whether the central bank considers its rate-cutting cycle complete or if further easing is possible in 2026. Analysts at TD Securities note that the ECB "is happy where it is, but ready to act should risks emerge," reflecting a balanced policy stance.

Meanwhile, the Pound Sterling remains fragile after the UK Office for Budget Responsibility (OBR) reportedly revised its productivity growth forecasts lower by 0.3%, potentially widening the fiscal gap by £20 billion. This revision comes ahead of Finance Minister Rachel Reeves' Autumn Budget on November 26 and reinforces the case for a dovish BoE. Markets currently price in a 68% probability of a 25-basis-point rate cut in December, while Goldman Sachs expects the first cut as early as next week.

In this context, the divergence between a stabilizing Eurozone economy and growing UK fiscal concerns continues to support EUR/GBP. The pair could see further volatility once the ECB's decision and Lagarde's remarks are released, as traders reassess the relative policy outlook between the two central banks.

EUR/GBP weekly chart. Source: FXStreet