EUR/GBP has fallen to its lowest level in over two months, currently trading around 0.8690, down 0.20% for the day. This decline is linked to increasing tensions between Ukraine and Russia, which are impacting confidence in the Euro. With these tensions rising, the Euro faces pressure due to concerns about energy security in Europe. Russia has reported drone attacks, while Ukraine is targeting Russian infrastructure, reigniting worries about energy supply given Europe’s past reliance on Russian imports.

Bank of England’s Monetary Policy

In contrast, the Pound Sterling gains some support from the Bank of England’s careful approach to monetary policy. The bank recently lowered its key interest rate by 25 basis points to 3.75% and indicated that more gradual cuts may follow soon. Inflation in the UK remains high, with November’s consumer price index (CPI) at 3.2%, which is above the target of 2%. This supports the Bank of England’s cautious strategy. Meanwhile, the European Central Bank (ECB) is keeping interest rates steady and providing uncertain guidance, limiting the Euro’s strength against the Pound. The ECB’s wait-and-see stance amid growing uncertainty further clouds future policy decisions. As EUR/GBP drops to around 0.8690, we observe a clear bearish trend driven by pressures on the Euro. Increased tensions in Eastern Europe have revived market anxieties about energy safety in the Eurozone, making the single currency risky to hold as uncertainty mounts. For traders in derivatives, this situation suggests strategies that could benefit from further declines in the currency pair. The Pound is receiving support from the Bank of England’s measured approach to interest rate cuts, a policy initiated in December 2025. Given that UK inflation remains well above the target at 3.2% as of late 2025, the BoE is not expected to implement aggressive cuts, helping keep the Pound strong.

UK and Eurozone Economic Indicators

The Bank of England’s cautious approach is justified by persistent inflation, which remained above 4% since late 2023. Recent figures show the UK services PMI for December stable at 51.2, indicating some economic resilience that supports a slower path to easing. In contrast, the German IFO Business Climate index fell to 85.1, reflecting the economic challenges facing the Euro. The difference between the slow-moving policy of the Bank of England and the European Central Bank’s uncertain, wait-and-see approach creates a strong case for a weaker Euro against the Pound. This policy divergence, which began to widen in the second half of 2025, is now the main factor driving this currency pair. We expect this trend to continue in the coming weeks. This outlook indicates that buying put options on EUR/GBP could be a smart strategy, enabling traders to take advantage of further declines while controlling risk to the premium paid. With geopolitical events likely to trigger sharp market movements, options provide a safeguard against sudden reversals. The VSTOXX index, which measures Eurozone volatility, has already risen by 4% in early January 2026, suggesting that traders are anticipating more turbulence. Given the ongoing uncertainty, implied volatility on EUR/GBP options may rise further. Traders should consider establishing bearish positions before volatility increases, as this makes options more expensive. A bear put spread, which involves buying a higher-strike put and selling a lower-strike one, could effectively reduce the cost of betting on a steady decline. Create your live VT Markets account and start trading now.

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