The Euro eased against the Pound on Monday, with EUR/GBP near 0.8689 and still within its week-old range. Trading was thin.
Eurostat said Eurozone industrial production fell 1.4% month on month in December, compared with a -1.5% forecast and after a prior 0.3% rise that was revised down from 0.7%. Year on year, production rose 1.2%, below the 1.3% expectation and down from 2.2% previously.
Euro Liquidity Backstop
Reuters reported that the ECB said central banks outside the Euro area could borrow Euros against collateral denominated in the euro zone’s currency. The new set-up allows borrowing up to €50 billion against euro-denominated marketable assets.
UK markets are waiting for employment data on Tuesday. CPI, PPI and the Retail Price Index are due on Wednesday, while market pricing implies about a 65% chance of a Bank of England rate cut in March.
In the Eurozone, attention turns to Tuesday’s ZEW Economic Sentiment survey and Germany’s CPI data. These releases may influence short-term EUR/GBP moves.
Looking back to early 2025, we saw the Eurozone’s industrial sector show signs of fragility while the market was betting on a Bank of England rate cut by March. That expectation of a dovish BoE was a key factor holding the pair in its range. However, the anticipated UK rate cuts never happened, as persistent inflation forced the BoE to maintain its stance.
Policy Divergence And Trading Implications
The data over the past year proved the market’s 2025 assumptions wrong, particularly on the UK side. UK core inflation, as reported by the Office for National statistics, failed to drop below 3.5% through the end of 2025, causing the BoE to keep its Bank Rate steady at 5.25%. This policy divergence from the European Central Bank, which has maintained a more dovish tone amid weak growth, has been the primary driver of price action.
Consequently, we have seen the EUR/GBP pair break below its old range, currently trading closer to 0.8550. The Eurozone economy has not materially improved, with the latest flash GDP for Q4 2025 showing a meager 0.2% growth. This continued economic sluggishness validates the ECB’s cautious stance and reinforces the fundamental weakness of the Euro against the Pound.
For derivative traders, this established trend of policy divergence suggests selling EUR/GBP rallies remains the strategic approach. We should consider buying put options with a three-month expiry to capitalize on potential further downside, especially ahead of key inflation data releases. Volatility has been compressed, making option premiums relatively inexpensive for positioning for a move lower.
The key risk to this view is a sudden shift in UK economic data that finally allows the BoE to signal rate cuts. Therefore, we will be closely watching the upcoming UK wage growth figures and services CPI. Any sign of softening there could trigger a short squeeze, making it prudent to use defined-risk strategies like put spreads rather than outright short futures.
