EUR\/GBP traded near 0.8660 in early European hours on Monday. Trading was cautious before the European Central Bank (ECB) and Bank of England (BoE) rate decisions on Thursday.<\/p>\n
The BoE is expected to keep rates unchanged on Thursday. Markets are watching for signs of a shift towards rate rises as the UK faces higher energy costs linked to the Iran war.<\/p>\n
Analysts state the UK economy may be sensitive to higher energy prices due to heavy use of natural gas. Oxford Economics expects Bank Rate to stay on hold for the rest of the year and notes that more information on the energy shock may be available by the end-July meeting.<\/p>\n
The ECB is also expected to leave policy unchanged on Thursday. Economists forecast the deposit rate will remain at 2.0%, where it has been since June last year.<\/p>\n
ECB policymakers are taking a wait-and-see approach due to uncertainty linked to the conflict in the Middle East. ECB official Martins Kazaks said last week that there is time to collect data before forming a view.<\/p>\n
Looking back to this period in 2025, we saw both the ECB and the BoE adopt a cautious stance due to geopolitical conflict. This created a coiled spring effect, where the EUR\/GBP exchange rate was stable but underlying tensions were building. The key for derivative traders at the time was to look at instruments sensitive to future volatility, as a policy divergence was becoming inevitable.<\/p>\n
The UK’s specific vulnerability to energy prices, which we highlighted in 2025, did indeed materialize later that year. We saw wholesale natural gas prices spike by over 15% in the fourth quarter of 2025, which kept UK inflation stubbornly above 3.5%, higher than in the Eurozone. This has backed the Bank of England into a corner, forcing it to maintain a more hawkish tone than its European counterpart into 2026.<\/p>\n
In contrast, the ECB\u2019s \u201cluxury of collecting data\u201d played out as they watched Eurozone core inflation cool more consistently, recently hitting a 24-month low of 2.7% in March 2026. This growing divergence means the ECB has significantly more room to consider rate cuts later this year, while the BoE does not. This fundamental split in policy direction is now the primary driver for the currency pair.<\/p>\n
Given this widening policy gap, we should anticipate further downward pressure on the EUR\/GBP cross in the coming weeks. Traders should consider positioning for a weaker Euro relative to the Pound, potentially using options to target a move towards the 0.8500 level. The market is increasingly pricing in a resilient BoE against a more dovish ECB, making short EUR\/GBP strategies more compelling.<\/p>\n
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