EUR/GBP rose on Friday as the Pound weakened amid political uncertainty in the UK. The pair traded near 0.8771, close to its highest level since 19 December.
Labour lost the parliamentary by-election in the Greater Manchester seat of Gorton and Denton. The seat had been held by Labour for nearly 100 years, and the result raised questions about Prime Minister Keir Starmer’s leadership.
Uk Data Pressures Sterling
UK data also weighed on Sterling, with the GfK Consumer Confidence index falling to -19 in February from -16 in January. It missed the forecast of -15.
In Germany, inflation data showed CPI rose 0.2% month-on-month in February, below the 0.5% forecast and above the prior 0.1%. CPI eased to 1.9% year-on-year from 2.1%, missing the 2% expectation.
Germany’s HICP increased 0.4% month-on-month, below the 0.5% forecast and up from -0.1% previously. Annual HICP eased to 2.0% from 2.1%.
Markets are pricing in the chance of a Bank of England rate cut in March. The European Central Bank is expected to keep rates unchanged through the rest of 2026.
Policy Divergence Supports Eur Gbp
Given the widening policy gap between the Bank of England and the European Central Bank, we see continued upward potential for EUR/GBP. The market is now pricing in an 85% probability of a rate cut from the BoE at its March meeting, creating a clear fundamental driver for Sterling weakness. This contrasts sharply with the ECB, which is expected to hold rates steady through the end of the year.
The political situation in the United Kingdom is adding to the pound’s troubles, directly impacting its risk profile. The surprising loss of a historically safe Labour seat fuels uncertainty around the government’s stability and is likely to keep Sterling under pressure. This political risk is compounding weak economic data, such as the recent GfK Consumer Confidence drop to -19 and last week’s Office for National Statistics report showing a 0.7% fall in January retail sales.
On the other side of the trade, the Euro remains firm despite German inflation easing slightly. Eurozone HICP inflation is stable at 1.9%, very close to the ECB’s target, giving policymakers little reason to alter their steady course. This stability makes the Euro an attractive alternative to the politically volatile pound.
For derivative traders, this environment suggests buying EUR/GBP call options to profit from expected upside moves in the coming weeks. The rising political uncertainty is also pushing up implied volatility, making strategies like call spreads attractive to manage the higher premium costs. This allows us to position for a continued climb in the exchange rate while defining our risk.
Looking back at the trends in 2025, we saw a similar pattern when early signs of a UK slowdown caused the pair to climb from the low 0.85s. This historical precedent supports the view that policy divergence is a powerful and sustained theme for this currency pair. Therefore, using longer-dated futures contracts to build a long EUR/GBP position could be a prudent strategy for the months ahead.
