Sticky UK inflation and firmer activity data have limited expectations of Bank of England rate cuts and supported the Pound. Softer labour data has not led to a large shift towards a more dovish outlook.
A by-election in Greater Manchester on 26 February is linked to higher near-term GBP volatility. The Pound’s limited response to stronger data last week suggests positioning may be restrained until after the vote.
Outlook For Eur Gbp
EUR/GBP is expected to drift lower once political uncertainty eases. Recent UK growth indicators are described as improving and may continue to strengthen.
The Pound is being supported by sticky inflation and a surprisingly resilient economy, which is limiting how quickly the market expects the Bank of England to cut rates. January’s inflation figures came in at 2.9%, still stubbornly above the central bank’s target. This economic strength is providing a floor for the currency for now.
However, we are seeing hesitation from investors, reminiscent of the political uncertainty we faced around the by-election this time last year in 2025. With the Chancellor’s Spring Budget scheduled for March 11th, short-term volatility in the Pound is likely to remain elevated. This suggests that the positive economic data is being held back by upcoming political event risk.
For derivative traders, this environment of high uncertainty but a firm underlying trend presents specific opportunities. The rise in one-month implied volatility suggests options are pricing in a significant move, making strategies like buying straddles or strangles potentially useful to capture a breakout after the budget is announced. This allows traders to benefit from a large price swing without needing to predict the exact direction.
Potential Post Budget Positioning
Looking back, we saw EUR/GBP drift lower after the political risks faded in late February and early March of 2025. If the budget passes without major negative surprises, we could see a similar dynamic play out, where the Pound’s strength begins to reflect the economic data more clearly. Therefore, positioning for a retracement lower in EUR/GBP after the budget could be a prudent medium-term strategy.
