The EUR/GBP currency pair began the week slightly down, trading at about 0.8715 on Monday. The Pound Sterling is supported by expectations of gradual interest rate cuts from the Bank of England (BoE). Meanwhile, the Euro’s decline is limited due to the nearing end of the European Central Bank’s (ECB) rate-cutting cycle. BoE Governor Andrew Bailey recently said that future interest rate cuts will be small, leaving limited room for further reductions. UK inflation dropped to 3.2% in November, still above the BoE’s target of 2%. Additionally, GDP grew by 0.1% in the third quarter, which matches forecasts.

ECB’s Monetary Policy Outlook

In contrast, the ECB has maintained steady rates, suggesting that major cuts may be over. Money markets show there is less than a 10% chance of a 25-basis-point cut by the ECB in February, indicating potential stability for the Euro in the short term. As New Year celebrations approach, trading conditions are likely to remain stable due to lower market liquidity. The EUR/GBP pair might hold steady, supported by a consistent Eurozone monetary policy and the BoE’s cautious easing. Considering the current situation, we expect the Pound Sterling to stay strong since the BoE is likely to cut interest rates only gradually in 2026. Recent data shows UK core inflation at 4.1% in November, considerably above the 2% target. The Bank’s careful strategy, having recently reduced the policy rate to 3.75%, indicates they are still addressing inflation. The Euro is also seeing support from the idea that the ECB may have finished its rate-cutting cycle for now. The latest Eurostat estimate showed Eurozone inflation steady at 2.4% in December 2025, giving the ECB reason to pause and evaluate. Thus, money markets are pricing in less than a 10% chance of a rate cut in February 2026, which helps bolster the Euro.

Trading Environment and Strategies

For derivative traders, the low trading volume as we head into the New Year suggests a period of low volatility for EUR/GBP. The one-month implied volatility for the pair has dipped to about 4.8%, indicating expectations for calm market conditions. This scenario could make short-range strategies, like selling strangles with strikes outside of an expected 0.8680-0.8750 range, attractive for the first week of January 2026. However, the underlying pressures favor the Pound, suggesting a slow decline in the EUR/GBP pair. In the options market, one-month risk reversals show a slight advantage for GBP calls against the Euro, indicating a subtle preference for Sterling strength. Traders may consider buying puts on EUR/GBP or setting up bearish call spreads to position for a decline towards the 0.8650 level in the upcoming weeks. This perspective is reinforced by positioning data from the week ending December 23, 2025, which revealed a slight increase in speculative net-long positions on Sterling. This indicates that traders are growing more confident in the Pound’s strength. Therefore, any short-term rallies in EUR/GBP could be viewed as chances to establish positions that profit from a stronger Pound in early 2026. Create your live VT Markets account and start trading now.

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