EUR/GBP rose in volatile trading on Thursday, with the Euro outperforming the Pound. The pair traded near 0.8726, close to one-month highs.
Middle East tensions stayed in focus after US President Donald Trump said military operations against Iran would continue, with no end date given. This raised concerns about supply disruption through the Strait of Hormuz and kept oil prices elevated.
Oil Prices And Rate Expectations
Higher oil prices can add to inflation and weigh on growth, which can lead central banks to keep policy tight. Markets are pricing in 2–3 rate hikes from both the European Central Bank (ECB) and the Bank of England (BoE).
Both the Eurozone and the UK rely on imported energy, leaving them exposed to an energy shock. Eurozone inflation is moving closer to the ECB’s 2% target, while UK inflation remains well above the BoE’s 2% target, alongside weaker labour market conditions and slower growth.
ECB officials sounded cautious, with Gediminas Šimkus saying it was too early to decide what is needed in April, and calling for caution on rates. Fabio Panetta warned about energy market tensions affecting inflation, growth, and financial stability.
BoE Governor Andrew Bailey said markets may be moving too fast in pricing rate rises. He said the BoE watches inflation expectations closely.
Shifting Drivers For Eur Gbp
Looking back, we can see the geopolitical tensions in 2025 created a choppy but clear upward trend for EUR/GBP, driven by the UK’s greater vulnerability to the energy shock. That period saw the cross touch the 0.8800 level as traders priced in a more challenging outlook for the pound. Now, with those specific tensions having eased, the drivers have shifted significantly.
The primary focus now is the divergence in inflation paths between the UK and the Eurozone. We’ve seen UK CPI data for March 2026 fall to 2.8%, a significant drop, which supports the Bank of England’s cautious stance on further hikes. In contrast, Eurozone core inflation remains stubbornly above 3%, keeping pressure on the European Central Bank to maintain its restrictive policy for longer.
This dynamic suggests that while the pound showed relative weakness during last year’s energy crisis, the euro may outperform now due to stickier inflation and a more hawkish central bank. The Bank of England is now widely expected to begin cutting rates before the ECB, with markets currently pricing in a first cut by August 2026. This policy divergence should continue to support EUR/GBP in the coming weeks.
Given this outlook, traders should consider positioning for further EUR/GBP strength, though perhaps with less aggressive volatility than we saw in 2025. Buying near-term call options on EUR/GBP with a strike around 0.8750 could offer a defined-risk way to profit from the expected policy divergence. The lower geopolitical risk premium means implied volatility is lower than last year, making options strategies more affordable.
