Trade Recommendation: SHORT EURGBP (HALF RISK AT CMP 0.8655, HALF RISK AT 0.8725) TP 0.8505 & SL 0.8770. We believe BOE’s last week cut was a hawkish cut with final outcome of 5-4 vote for 5 voting for 25 cuts & 4 voting for hold. This was against market expectations of 2-5-2 i.e. 2 members voting for 50 bps cut, 5 members voting for 25 bps cut & 2 members voting for hold. Also, the BoE’s updated macroeconomic forecasts (average inflation projections were raised for 2025-27) and the closeness of the policy vote send a clear hawkish signal, and raise doubts over the pace and extent of further easing from here. We now expect the next cut by BOE in Dec’25. By the 7 November meeting, policy makers should have further evidence of labour-market weakness but are unlikely to know if inflation has peaked – the BoE now anticipates a peak of 4.0% in September, but the October data will not be released until after the November meeting. So, MPC members may opt to wait for signs of falling y/y inflation. This implies a stronger GBP on interest rate differentials specially against EUR where we feel ECB might be forced to cut another 25 bps by Dec’25. Eurozone faces immediate short-term headwinds of 15% tariffs as well as a slowing Chinese economy. We expect the euro area economy to recover only gradually in the near term, due to soft consumption and structural weakness. Eurozone is only pricing in 13 bps of cut by Dec’25 which we believe is very low compared to where actual macro numbers might pan out in next quarter. So, while BOE might remain on hold till Dec, ECB might have to cut by 25 bps before even Dec. Even terminal rate wise, GBP looks attractive against EUR at current EURGBP levels.
