The euro fell against sterling on Wednesday after Eurozone inflation undershot expectations, tempering market pricing for another European Central Bank (ECB) rate rise this year. EUR\/GBP was trading near 0.8598, its lowest level since July 2025, with attention turning to remarks due later at the ECB Forum in Sintra from ECB President Christine Lagarde and Bank of England (BoE) Governor Andrew Bailey.<\/p>\n\n
Eurostat data showed preliminary Harmonised Index of Consumer Prices (HICP) inflation slowed to 2.8% year on year in June from 3.2% in May, below a 3.0% forecast, while the monthly reading fell 0.1% after a 0.1% increase previously. Core HICP eased to 2.4% year on year from 2.6%, and rose 0.2% month on month after 0.3%. In the UK, markets tracked political uncertainty after Prime Minister Keir Starmer resigned last month, and Bailey said UK inflation could still rise to 3.2% later this year, adding that tighter financial conditions give the BoE time to assess the Bank Rate.<\/p>\n\n
We believe the softer Eurozone inflation data confirms a growing policy divergence between the ECB and the Bank of England. The drop in headline inflation to 2.8%, a significant fall from the peaks above 5% seen last year, strengthens the case for the ECB to pause its hiking cycle. This should keep downward pressure on the EUR\/GBP exchange rate in the coming weeks.<\/p>\n\n
Given this outlook, we are looking at buying put options on EUR\/GBP to capitalize on further downside below the 0.8600 level. The upcoming speeches by Lagarde and Bailey will be critical and could increase short-term volatility. We are therefore structuring trades with expiries beyond these events, looking towards late July or August.<\/p>\n\n
The contrast is stark when comparing core inflation, which has fallen to 2.4% in the Eurozone while the UK’s core CPI remains elevated above 4.5%, according to the latest ONS data from last month. This inflation differential supports a fundamentally weaker Euro relative to the Pound. Consequently, we are seeing one-month implied volatility in EUR\/GBP options tick up towards 8%, reflecting the market’s uncertainty around the central bank speakers.<\/p>\n\n
We are also positioning for the possibility of selling into any strength should ECB President Lagarde strike a more hawkish tone than the market expects. While the UK’s political situation following Starmer’s resignation creates some Sterling uncertainty, the immediate focus remains on the more stubborn inflation problem facing the Bank of England. Historically, UK inflation has proven more persistent, suggesting the BoE’s job is far from over.<\/p>\n\n\n\n