EUR/GBP hits yearly highs amid UK political tensions and BoE rate-cut bets

• EUR/GBP hits fresh yearly highs as UK political uncertainty and BoE rate-cut expectations weigh on the Pound.
• Steady German inflation and hawkish ECB tone support the Euro's relative strength against the Pound.
• Markets eye key data ahead, including UK GDP and Eurozone Industrial Production, for near-term direction.

The Euro (EUR) extends gains against the British Pound (GBP) on Wednesday as the Sterling weakens across the board following reports of growing tension within the UK Labour Party and speculation over Prime Minister Keir Starmer's leadership, which has added to political uncertainty ahead of this month's budget.

At the time of writing, EUR/GBP is trading around 0.8836, marking fresh year-to-date highs and its strongest level since April 21, 2023.

According to recent media reports, allies of Prime Minister Keir Starmer have warned that any move to challenge his leadership would be "reckless," amid rumours of internal divisions and weakening public support. The uncertainty comes just days before the November 26 budget, with investors increasingly concerned that fiscal tightening and potential tax hikes could weigh on the UK's growth outlook.

On the macro front, weak labour market data released on Tuesday has reinforced expectations that the Bank of England (BoE) will lower interest rates at its December meeting. According to a Deutsche Bank report, the probability of a BoE rate cut jumped from 72% at Monday's close to around 86% on Tuesday.

On the Euro side, data from Germany showed that inflation held steady in October. The Harmonized Index of Consumer Prices (HICP) rose 0.3% MoM and 2.3% YoY, both in line with expectations.

Meanwhile, hawkish comments from European Central Bank (ECB) policymaker Isabel Schnabel added to the Euro's relative strength, as she noted that the economy still shows "positive underlying momentum" and that "services inflation remains sticky." Schnabel further said interest rates are "absolutely in a good place" but warned that inflation risks are "tilted slightly to the upside," signaling that the ECB is comfortable keeping rates unchanged for the foreseeable future.

Looking ahead, traders brace for a slew of key economic releases on Thursday, including the UK's preliminary third-quarter Gross Domestic Product (GDP), Industrial Production, and Manufacturing Production figures. The Eurozone will also publish Industrial Production data for September