The Euro held firm against the Pound on Thursday, as expectations of Bank of England rate cuts weighed on Sterling. EUR/GBP was near 0.8737, easing after nearing 0.8750.
UK inflation data added to rate-cut expectations. CPI fell 0.5% month-on-month in January after a 0.4% rise in December, while annual CPI slowed to 3.0% from 3.4%.
Uk Inflation And Jobs Data
Core CPI eased to 3.1% year-on-year from 3.2%. UK labour market data also softened, with employment change at 52K in the three months to December versus 82K before.
The ILO unemployment rate rose to 5.2%, the highest since early 2021. BoE policymaker Catherine Mann said inflation is likely to return to 2% within three to four months.
Markets are pricing in easing from as early as the BoE’s March meeting, with nearly two more cuts expected later in 2025. In the Eurozone, mid-week uncertainty followed reports that ECB President Christine Lagarde could leave before October 2027.
Concerns eased after Reuters reported Lagarde told colleagues she remains focused on her role. Markets expect the ECB to keep rates on hold through 2026, with inflation near 2%.
Focus Turns To Upcoming Data
Focus now shifts to Friday’s UK Retail Sales and preliminary PMI data for the UK and Eurozone.
Looking back to early 2025, we saw the Pound weaken as the market began pricing in Bank of England rate cuts. That sentiment was driven by falling inflation and a cooling UK labour market. The EUR/GBP pair was consequently firm, trading around the 0.8740 level.
Since then, the BoE did deliver two rate cuts in 2025, bringing its key rate down to 4.75%. However, the latest January 2026 inflation figure surprised by ticking up to 2.8%, complicating the outlook for further easing. This stickiness in prices, even with unemployment elevated at 4.5%, suggests the path of least resistance for the Pound is no longer clearly down.
The European Central Bank, as expected, maintained its steady policy, holding its main rate at 4.50% throughout 2025. Eurozone inflation has also proven stubborn, with the latest data for January 2026 showing a rate of 2.5%. The chatter about President Lagarde’s early departure last year ultimately amounted to nothing, and the ECB’s focus remains on its inflation mandate.
For us, the clear policy divergence that drove the Euro’s strength against the Pound last year has faded. With EUR/GBP having already risen to the 0.8950 area, we should consider strategies that profit from range-bound price action, like selling volatility through short straddles. Traders could also buy short-term puts on GBP as a hedge against any surprisingly downbeat UK data that revives rate cut bets.
Upcoming preliminary PMI figures for February will be critical. Any significant downturn in the UK’s dominant services sector, which represents almost 80% of the economy, could pressure the BoE to signal more cuts and weaken the pound. Conversely, continued resilience in the Eurozone economy would reinforce the ECB’s patient stance.
