EUR/GBP is stable around 0.8630, close to a five-month low, as market participants await monetary policy decisions from the European Central Bank (ECB) and the Bank of England (BoE). Both central banks are expected to maintain current interest rates during their Thursday announcements.
The ECB is predicted to keep its Deposit Facility Rate at 2%, with Eurozone inflation near the 2% target. A temporary slowing in inflation, attributed to energy base effects, supports this expectation. The release of the preliminary Eurozone Harmonized Index of Consumer Prices (HICP) for January is set for Wednesday.
January Inflation Expectations
Forecasts suggest a 1.7% year-on-year rise in headline inflation, down from 1.9% in December. Meanwhile, core inflation is anticipated to stay steady at 2.3%, aligning with the ECB’s current stance.
In the UK, the BoE is also likely to maintain its policy rate at 3.75%. The impact of December’s 25-basis-point rate cut has not yet been fully realised in the economy. However, an increase in UK inflation complicates further near-term easing, with the Consumer Price Index (CPI) rising to 3.4% year-on-year in December.
This development may prompt caution from BoE officials in implementing further rate cuts. Traders remain attentive to forthcoming policy directions in both regions.
Current Market Conditions
As we stand today on February 3, 2026, the EUR/GBP cross trades near 0.8450, reflecting a year of policy divergence we first saw taking shape in early 2025. At that time, we were watching the pair stabilize near 0.8630, with both the Bank of England (BoE) and European Central Bank (ECB) expected to hold rates. The key difference was the BoE’s intended easing path versus the ECB’s more neutral stance.
The cautious view on the BoE’s ability to cut rates back in 2025 proved correct, as UK inflation remained stubbornly high throughout the year. The initial inflation warning we noted in December 2024, at 3.4%, was not temporary; the most recent data for December 2025 showed UK CPI at 3.8%. This forced the BoE to reverse course and hike its policy rate to the current 4.25% to restore credibility.
In contrast, the Eurozone’s inflation picture has been far more benign, aligning with the early 2025 forecasts. The latest flash Harmonized Index of Consumer Prices for January 2026 registered 2.1%, comfortably within the ECB’s target range. This has allowed the ECB to proceed with a modest easing cycle, bringing its deposit rate down to 1.75%.
Given this entrenched policy gap, strategies that benefit from a lower or range-bound EUR/GBP are favorable for the coming weeks. With 1-month implied volatility now at a subdued 4.8%, selling out-of-the-money EUR/GBP call options to collect premium appears attractive. This capitalizes on the view that significant sterling weakness is unlikely as long as UK rates remain this high.
The main risk to this outlook is the growing strain on the UK economy, which could force the BoE to pivot. We saw that UK GDP grew by only 0.1% in the final quarter of 2025, and leading indicators for early 2026 point toward a potential contraction. Traders should therefore use put options on EUR/GBP as a hedge against any surprise dovish commentary from the BoE that prioritizes growth over inflation.
