Expectations for further Bank of England tightening are fading, pushing front-end UK yields lower and supporting the euro against the pound.
Pricing for December BoE policy has eased by around 10 basis points to 34 basis points, according to ING analyst Francesco Pesole. That move signals reduced confidence that the UK central bank will deliver additional rate hikes this year.
By contrast, the European Central Bank is maintaining a more hawkish tone, a divergence that ING expects to keep short-term UK yields falling faster than those in the euro area. This relative move in yields is seen as a key factor underpinning EUR/GBP beyond the near term.
Market shifts away from tighter BoE policy
EUR/GBP has recently come under pressure as global risk sentiment improved, typically a backdrop that can support the pound. ING argues this impact is likely to be temporary.
Once market volatility settles, differences in interest rate paths should regain dominance as the main driver of the pair, the bank notes. Rate differentials remain the primary guide for the medium-term direction of EUR/GBP.
Pesole expects the decline in front-end UK rates relative to the euro area to continue, keeping upward support under the euro against the pound as the monetary policy gap widens. ING maintains a forecast for EUR/GBP to move towards 0.880 this quarter.
Rate differentials seen as main driver for EUR/GBP
Recent comments from senior BoE officials have reinforced the market’s reassessment of further UK tightening.
Governor Andrew Bailey and Monetary Policy Committee member Megan Greene have both highlighted the need to monitor second-round inflation effects before altering policy. Their remarks underline a cautious approach and a preference to wait and see how past rate moves filter through the economy.
This tone has contributed to the scaling back of expectations for additional hikes, and fits with the recent decision to hold the bank rate steady.
BoE stresses patience and second-round inflation risks
The UK bank rate currently stands at 3.75%, after the BoE left policy unchanged at its March meeting.
The next policy announcement is scheduled for 30 April. Market pricing points to a roughly 97% probability that the committee will again keep rates on hold, underscoring the shift towards a more patient stance on Threadneedle Street.
That marks a notable change from the outlook at the start of 2026, when the debate centred on the timing of potential rate cuts, before geopolitical tensions and higher energy prices pushed expectations back towards possible hikes.
Current BoE stance and upcoming decision
On the continent, the ECB faces a different mix of risks. It kept its key deposit rate at 2.00% at its own March meeting, but simultaneously raised its inflation forecast for 2026 to 2.6%, citing the impact of elevated energy costs.
The higher projection underpins a more assertive policy tone, with officials emphasising readiness to act to keep inflation close to the 2% medium-term target. This stance contrasts with the BoE’s more cautious messaging and is central to the widening policy gap.
ECB holds rates but raises inflation outlook
The growing divergence between the two central banks is feeding directly into bond markets. Short-term UK yields are declining more quickly than their euro area counterparts as markets price out some BoE tightening while still assigning more hawkish intent to the ECB.
According to ING, this continued fall in front-end UK rates versus the euro area should provide ongoing upward momentum for EUR/GBP as the policy gap broadens, keeping the euro supported against the pound in the months ahead.
Yield spread underpins euro strength
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