EUR/GBP traded higher near 0.8715 in early European dealings on Thursday, moving above 0.8700. The move came as UK political risk weighed on the Pound, while markets also watched for a speech by ECB President Christine Lagarde later in the day.
Manchester’s Gorton and Denton constituency is holding a by-election on Thursday to fill a vacant seat. The vote is being watched as a test for Prime Minister Keir Starmer, amid reports of internal party tensions and low approval ratings.
Eurozone Inflation And ECB Focus
In the Eurozone, inflation eased to 1.7% year on year in January, the lowest level in 16 months. Traders are also waiting for Germany’s preliminary CPI reading on Friday, which could affect expectations for ECB policy.
The Pound Sterling dates back to 886 AD and is the UK’s official currency, issued by the Bank of England. It is the fourth most traded currency, making up 12% of global FX transactions, averaging $630 billion a day in 2022 data.
Key pairs include GBP/USD at 11% of FX, GBP/JPY at 3%, and EUR/GBP at 2%. Sterling is influenced by BoE policy aimed at around 2% inflation, as well as data such as GDP, PMIs, jobs figures, and the trade balance.
We recall that at this time in 2025, the EUR/GBP was pushing above 0.8700, largely driven by political uncertainty surrounding the UK government. The special election in Manchester was seen as a major test for the Prime Minister, creating headwinds for the Pound Sterling. This period was marked by concerns over domestic UK stability weighing on the currency.
Shift In The 2026 Policy Divergence
Fast forward to today, February 26, 2026, the dynamic has shifted, with the pair trading closer to 0.8650. UK inflation, reported last week for January, remains persistent at 2.5%, keeping pressure on the Bank of England to maintain its current 5.25% bank rate. This contrasts with the situation a year ago when Eurozone inflation was rapidly cooling.
From the European perspective, inflation has stabilized, with the latest Harmonised Index of Consumer Prices for the Euro area coming in at 1.9%. With inflation so close to the European Central Bank’s target, markets are pricing in a higher probability of an ECB rate cut before the Bank of England acts. This potential policy divergence is now the main driver for the currency pair.
For derivative traders in the coming weeks, this sets up a play on volatility. With both central banks in a data-dependent mode, buying options straddles ahead of the March policy meetings could be a prudent strategy to capture any sharp move. This approach benefits from a significant price swing in either direction, which is likely if one bank signals a clearer policy path than the other.
Upcoming data will be crucial, so traders should be positioned for the release of the preliminary February inflation figures and the UK’s annual budget statement. Any surprise in UK wage growth data or German economic sentiment could cause the pair’s current tight range to break. We see implied volatility in one-month options contracts ticking up from 5.2% to 5.8% over the past week, suggesting the market is anticipating a move.
