EUR/GBP extends its gains above the mid-0.8600s as BoE rate cut bets increase

• EUR/GBP trades in positive territory for two straight days on Thursday. 
• The sharp fall in UK inflation data raises the odds that the Bank of England (BoE) will cut interest rates by May 2024.
• Many ECB policymakers warned markets against betting on imminent rate cuts. 
• Investors will closely watch the UK’s GDP growth numbers for the third quarter (Q3), due on Friday. 

The EUR/GBP cross holds positive ground for the second consecutive day during the early European session on Thursday. The hawkish stance of the European Central Bank (ECB) lends some support to the cross. EUR/GBP currently trades near 0.8663, up 0.06% on the day. 

Late Wednesday, European Central Bank (ECB) Governing Council member Martins Kazaks said that they need to maintain interest rates at the current level for some time, but the first rate cut could come around mid-2024. 

Meanwhile, the two hawks from the ECB warned markets against betting on imminent rate cuts. ECB policymaker Klaas Knot stated that the potential for economic recovery in the eurozone next year and uncertainty over the strength of wage growth mean there’s no reason for the central bank to rush into rate cuts. Additionally, Joachim Nagel said that they must keep the current interest rate plateau so that monetary policy can fully develop its inflation-dampening effect.

On the other hand, the sharp fall in UK inflation data prompted investors to increase their bets that the Bank of England (BoE) will cut interest rates in the first half of next year. The annual UK Consumer Price Index (CPI) for November rose 3.9% versus 4.6% prior, below the market expectation of 4.4%, while the Core CPI eased from 5.7% in October to 5.1% in November, worse than the expectation of 5.6%.

The markets are now fully pricing in a BoE rate cut by May 2024 and now see a nearly 50% chance of a cut by March. This, in turn, exerts some selling pressure on the British Pound (GBP) and acts as a tailwind for the EUR/GBP cross. 

Later on Thursday, November’s UK Public Sector Net Borrowing and Italy’s Producer Price Index (PPI) will be released. On Friday, the UK’s Gross Domestic Product (GDP) for the third quarter (Q3) will be in the spotlight. Traders will take cues from the data and find trading opportunities around the EUR/GBP cross.