Nomura analysts said UK wage and inflation data still point to further monetary policy convergence with the euro area. They linked this to downward momentum in the labour market, especially private sector wage trends, and noted the UK unemployment rate has risen more than most developed market peers.
They said some labour indicators have cooled less, such as PAYE jobs, but the overall picture still supports easing. On inflation, they said headline inflation matched consensus but was slightly above the Bank of England forecast.
Services Inflation And Rate Cut Timing
They said services inflation was stickier, at 0.25ppt above the Bank of England’s expectation. They said this reduces the chance of a March rate cut and may affect short-term decisions by Monetary Policy Committee members.
They said the services inflation trend still supports policy convergence with the euro area. They also said a narrowing in EUR-GBP front-end rate spreads would be positive for EUR/GBP.
They pointed to next week’s UK by-election as the next market focus, after PMIs on Friday. They said a loss for the incumbent Labour Party would raise pressure on Prime Minister Starmer and increase the chance of a leadership change.
We saw this argument for rate convergence play out during 2025, with both central banks beginning their easing cycles. The Bank of England has since cut rates to 4.50%, while the ECB’s key rate now stands at 3.25%, narrowing the differential that once favored the pound. This underlying trend continues to support a long EUR/GBP bias in the weeks ahead.
Sticky Services Inflation And Policy Divergence
The concern about sticky services inflation from early 2025 remains relevant today, with the latest UK data showing it at 3.5%, still well above the headline CPI of 2.1%. This stickiness could slow the pace of future BoE cuts compared to the ECB, where core inflation is now comfortably below 2.5%. Traders should consider buying medium-term EUR/GBP call options to profit if this policy divergence theme accelerates.
The softening in the UK labour market that we identified last year has indeed continued, although at a gradual pace. The unemployment rate has crept up to 4.5%, and wage growth, while still firm at 4.0%, is on a clear downward path from the highs seen in 2024. This reinforces the view that the BoE has room for further easing later this year, potentially weighing on the pound.
Looking back, the political risks highlighted in early 2025 did cause brief spikes in volatility, especially around fiscal announcements. While the government has since stabilized, ongoing trade negotiations with the EU present a new source of uncertainty for Sterling. This backdrop suggests using strategies like bull call spreads on EUR/GBP, which cap potential losses while positioning for upside.
