The Euro dipped slightly against the Pound on Wednesday but held most recent gains, with a seven-week high near 0.8745. Sterling weakened as a UK political crisis increased pressure on Prime Minister Keir Starmer to resign.
Reports linked the former UK ambassador to the US, Peter Mandelson, to convicted sex offender Jeffrey Epstein, prompting developments that reached Starmer. Calls for Starmer to step down were reported to include members of his own cabinet.
Uk Politics Weighs On Sterling
With few UK data releases early in the week, political uncertainty left the Pound among the weakest major currencies. The Euro was supported by the European Central Bank’s recent hawkish stance.
Attention turns to the UK’s preliminary Q4 GDP on Thursday, forecast to slow to 1.2% annualised growth from 1.3% in the previous quarter. Manufacturing Production is expected to be flat in December.
In the Eurozone, scheduled data were limited, while ECB comments offered support. Christine Lagarde said inflation should stabilise around 2% and played down recent low CPI readings.
On Tuesday, Vice President Luis de Guindos said the Euro’s recent rise was not dramatic, suggesting interest rates may stay steady for a period.
Market Positioning And Trade Ideas
The current political turmoil in the UK is the main driver for the Pound’s weakness. With calls for the Prime Minister to resign, we see significant uncertainty hitting the market. This is clearly fueling the EUR/GBP exchange rate’s move toward the 0.8745 level.
This political instability reminds us of the market reaction during the 2022 mini-budget crisis, when we saw GBP fall to historic lows. Compounding this, recent data from late 2025 showed UK inflation remaining sticky at 4.0%, while tomorrow’s GDP figures are expected to confirm a slowing economy. This creates a difficult stagflationary environment for the Pound.
In contrast, the Euro is finding support from a firm European Central Bank. The latest inflation figures for January 2026 came in at 2.8%, which is still well above the ECB’s 2% target. This justifies their hawkish messaging and reduces the likelihood of near-term interest rate cuts.
Given the high level of political uncertainty, we expect implied volatility for the Pound to rise in the coming weeks. Traders should consider buying options to position for larger-than-expected price swings. For instance, purchasing call options on EUR/GBP would allow for profiting from further upside while capping potential losses.
A more direct approach would be to short GBP futures contracts, betting on continued weakness against other major currencies. The divergence is clear: the UK faces political risk and slowing growth, while the Eurozone has a central bank focused on fighting inflation. This fundamental difference supports a bearish view on the Pound.
