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.<\/p>\n
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%.<\/p>\n
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.<\/p>\n
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.<\/p>\n
Markets are pricing in easing from as early as the BoE\u2019s 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.<\/p>\n
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%.<\/p>\n
Focus now shifts to Friday\u2019s UK Retail Sales and preliminary PMI data for the UK and Eurozone.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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.<\/p>\n
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\u2019s patient stance.<\/p>\n
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