• The EUR/GBP rate fell to a fresh low in 2024 on Friday as sterling strengthened amid stronger-than-expected UK retail sales.
• The euro remains feeble after the ECB cut interest rates for two consecutive meetings, accelerating the monetary easing cycle.
• Analysts believe that divergent monetary policy could further reduce the EUR/GBP rate.

The EUR/GBP rate fell to a year-to-date low of 0.8295 on Friday as the pound sterling (GBP) appreciated against the euro (EUR) following the release of data showing British customers spent extravagantly in September.

The high data suggests that the Bank of England (BoE) will not be in such a hurry to reduce interest rates in the coming months. Given that the BoE’s interest rate is 5.00% (one of the highest among Western central banks), it is likely to continue to attract foreign capital inflows and, therefore, demand for sterling.

EUR/GBP daily chart

Meanwhile, the euro remains vulnerable on Friday, a day after the European Central Bank (ECB) decided to cut interest rates by 25 basis points (bps) (0.25%), lowering the central bank’s key deposit facility rate to 3.25%. Although this move received wide publicity, it represents a significant turning point in the ECB’s monetary easing cycle. By lowering interest rates at two consecutive meetings, the ECB – according to analysts – signaled an acceleration of the interest rate easing cycle, which suggests more recurrent cuts in the future. Moreover, the decision was accompanied by a moderately dovish statement and a question and answer session by ECB President Christine Lagarde.

“Lagarde confirmed that yesterday’s decision to cut by 25 basis points was unanimous and emphasized that there are more downside than upside risks to inflation,” Brown Brothers Harriman (BBH) said in a note. “The market is currently pricing in ECB interest rate cuts of almost 175 basis points over the next twelve months, with the lowest interest rate near 1.50% compared to 2.00% at the beginning of the week,” it continues.

On Friday, ECB officials took an unequivocally dovish stance, adding fuel to the flames left by the meeting. ECB member and Banque de France president Francois Villeroy de Galhau said the direction was clear for him: “we should continue to appropriately limit the restrictive nature of our monetary policy.” Meanwhile, Boštjan Vasle, member of the ECB Governing Council, noted that everything indicates that the disinflation process is gaining momentum.

According to BBH, EUR/GBP may continue its downward trend after UK retail sales data. The data surprised on the upside: Retail sales increased by 0.3% m/m, exceeding expectations of a decline of 0.3% and an boost compared to growth of 0.1% in the previous month, which means that the policy paths of both banks central areas are rapidly diverging.

“GBP strengthened briefly on the back of stronger UK retail sales, which strengthened the case for a cautious BOE monetary easing cycle,” said Elias Hadid, senior market strategist at BBH. “Conclusion: the relative trend in monetary policy between the ECB and the BOE continues to favor EUR/GBP,” he concluded.

Not all economists are so confident that British interest rates will remain elevated – at least in the long term. Alex Kerr, UK economist at Capital Economics, disagrees with the market on the trajectory of UK interest rates, saying: “We still think the Bank of England will cut interest rates from the current 5.00% to 3.00% in early 2026 ., and not to 3.75% in the future.” expected by investors. However, if the Chancellor increased investment by more than we expect, he adds, interest rates may not fall so quickly.