EUR/GBP traded higher near 0.8725 in early European dealings on Wednesday, moving above 0.8700 and ending a three-day fall. The Pound weakened against the Euro ahead of UK political events, while European Central Bank President Christine Lagarde is due to speak later on Wednesday.
A by-election is scheduled on Thursday in Manchester’s Gorton and Denton constituency to fill a vacant parliamentary seat. The vote comes as UK Prime Minister Keir Starmer faces internal party tension and low approval ratings.
Uk Political Risk And Sterling
In the US, the Supreme Court ruled on Friday against many tariffs introduced by President Donald Trump. On Saturday, Trump said he would impose an additional 15% tariff, and the European Parliament agreed on Monday to delay a vote on the EU–US trade agreement.
Renewed trade tensions could affect the Euro, as the Eurozone is more exposed to trade disruption than the UK.
Looking back at the events of 2025, the political risks in the UK were a clear driver for Sterling weakness. The focus on the Manchester special election created uncertainty, pushing EUR/GBP above the 0.8700 level. We know that by-elections against a sitting government are notoriously difficult, with ruling parties historically losing their seats in over half of these contests since the year 2000.
However, the bigger threat that we saw unfolding was the renewed trade dispute between the US and the European Union. Similar tariff escalations back in 2018 led to a more than 5% drop in the Euro’s value in a single quarter, as Germany’s export-heavy economy is particularly vulnerable. This risk for the Euro provides a strong cap on how high the EUR/GBP cross can truly go.
Volatility Outlook And Trading Approach
Given these conflicting pressures, the primary takeaway is an expectation of increased volatility rather than a clear directional trend. One-week implied volatility for EUR/GBP is already ticking up, moving from an average of 5.5% to nearly 8% in anticipation of these events. Derivative traders should therefore consider strategies like long straddles or strangles, which profit from a large price move in either direction, to capitalize on the impending market chop.
