The EUR/GBP currency pair started the week trading slightly lower, with a rate of around 0.8715 on Monday. While the Pound Sterling finds support from expectations of a gradual easing from the Bank of England (BoE), the Euro’s downside is limited by the nearing end of the European Central Bank’s (ECB) rate-cut cycle.
Recent comments from BoE Governor Andrew Bailey suggest future interest rate cuts will be incremental, with limited room for further reductions. Inflation in the UK, though reduced to 3.2% in November, remains above the BoE’s target of 2%, while GDP grew by 0.1% in the third quarter, aligning with forecasts.
ECB’s Monetary Policy Outlook
In contrast, the ECB has kept rates steady, signaling that major cuts may be done. Money markets currently see less than a 10% possibility of a 25-basis-point cut by the ECB in February, hinting at potential Euro stability in the short term.
Ahead of New Year celebrations, trading conditions are expected to be relatively stable with reduced market liquidity. The EUR/GBP pair may remain steady, backed by a consistent Eurozone monetary policy stance and cautious easing by the BoE.
Given the current market, we see the Pound Sterling holding firm because the Bank of England is expected to cut interest rates only gradually in 2026. This view is strengthened by recent data from late 2025, where UK core inflation remained sticky at 4.1% in November, well above the 2% target. The Bank’s cautious approach, after cutting the policy rate to 3.75% earlier this month, suggests they are still fighting inflation.
The Euro, on the other hand, is finding support from the belief that the European Central Bank has likely finished its own rate-cutting cycle for now. We note that the latest Eurostat flash estimate showed Eurozone inflation holding at 2.4% in December 2025, which gives the ECB a reason to pause and observe. As a result, money markets are pricing in less than a 10% chance of a rate cut in February 2026, putting a floor under the Euro.
Trading Environment and Strategies
For derivative traders, the thin holiday trading volume heading into the New Year suggests a period of low realized volatility for EUR/GBP. One-month implied volatility for the pair has fallen to around 4.8%, reflecting the market’s expectation for calm. This environment could make short-dated, range-bound strategies, such as selling strangles with strikes outside an expected 0.8680-0.8750 range, seem appealing for the first week of January 2026.
However, the underlying fundamental pressure favours the Pound, pointing to a gradual drift lower in the EUR/GBP pair. Looking at the options market, one-month risk reversals show a slight premium for GBP calls against the Euro, indicating a subtle bias for Sterling strength. We see traders potentially looking at buying puts on EUR/GBP or implementing bearish call spreads to position for a move towards the 0.8650 level in the coming weeks.
This view is further supported by positioning data from the week ending December 23, 2025, which showed speculative net-long positions on Sterling increased slightly. This suggests that traders are building confidence in the Pound’s resilience. Therefore, any short-term rallies in EUR/GBP could be seen as opportunities to establish positions that benefit from a stronger Pound in early 2026.
