EUR/GBP traded near 0.8716 on Wednesday and fell for a fourth straight day after new Eurozone inflation data and Germany’s Q4 GDP figures.
Eurostat’s final estimates showed the Harmonised Index of Consumer Prices rose 1.7% year-on-year in January, down from 2.0% in December and the lowest in 16 months. This was the first final reading below the ECB’s 2% target since May 2025, while the monthly HICP fell 0.6%.
Eurozone Inflation And ECB Outlook
Core HICP dropped 1.1% in January after a 0.3% rise in December. On an annual basis, core inflation eased to 2.2% from 2.3%.
Markets still broadly expect the ECB to keep rates unchanged through 2026. ECB President Christine Lagarde said on Monday, “I very strongly believe that we are in that good place.”
Germany’s economy grew 0.3% quarter-on-quarter in Q4, matching forecasts and the prior reading. Annual GDP growth was 0.4%, also in line with expectations.
BoE Cut Expectations And Trade Implications
In the UK, attention turned to the Bank of England, with rates seen as possibly being cut in March. Governor Andrew Bailey told Parliament’s Treasury Committee that a cut is a “genuinely open question”, with decisions guided by inflation and wage data.
With Eurozone inflation dipping to 1.7% in January, well below the central bank’s target, we see little reason for the European Central Bank to alter its steady policy. This confirms President Lagarde’s recent statements that policy is in a “good place,” solidifying expectations for rates to remain unchanged for the foreseeable future. The stability in German GDP further removes any immediate pressure on the ECB to act.
The key divergence for us is now the growing expectation of a Bank of England rate cut, possibly as soon as March. Governor Bailey’s comments have opened the door, and market pricing is adjusting accordingly. Overnight Index Swaps are now pricing in a greater than 60% chance of a 25 basis point cut from the Bank of England next month.
This creates a clear trade dynamic where the Euro has a stable policy floor while the Pound faces imminent easing pressure, which should push EUR/GBP higher in the coming weeks. The current dip below 0.8720, driven by the soft inflation print, could therefore present a strategic entry point. We should consider using options, such as buying EUR/GBP call spreads, to position for a rebound while managing downside risk.
Looking back, we saw a similar divergence develop in late 2024 when speculation about central bank pivots first began, leading to profitable trends for those positioned early. The crucial data points to watch now will be the next UK inflation and wage reports. If last month’s core UK inflation of 3.9% shows any sign of accelerating weakness, expectations for a March cut will solidify and likely drive the pair upward.
Meanwhile, recent PMI figures from early February showed the Eurozone service sector remains resilient while manufacturing is still in contraction, reinforcing the disinflationary trend. This supports our view that the ECB will remain on hold long after the BoE begins its cutting cycle. This policy gap is the central theme we should be trading on.
