EUR/GBP is holding steady around 0.8630, which is close to a five-month low. Market participants are waiting for announcements regarding monetary policy from the European Central Bank (ECB) and the Bank of England (BoE). It is expected that both central banks will keep interest rates the same during their meetings on Thursday. The ECB is likely to maintain its Deposit Facility Rate at 2%, especially since inflation in the Eurozone is near the 2% target. A temporary slowdown in inflation, caused by energy base effects, supports this outlook. The preliminary data for the Eurozone Harmonized Index of Consumer Prices (HICP) for January will be released on Wednesday.

Inflation Expectations for January

Forecasts indicate a 1.7% year-on-year increase in headline inflation, down from 1.9% in December. At the same time, core inflation is expected to stay steady at 2.3%, which is in line with the ECB’s current policy. In the UK, the BoE is also likely to keep its policy rate at 3.75%. The effects of December’s 25-basis-point rate cut have not fully played out in the economy yet. However, rising inflation in the UK complicates any near-term rate cuts, as the Consumer Price Index (CPI) rose to 3.4% year-on-year in December. This situation may make BoE officials cautious about cutting rates further. Traders are closely watching policy developments in both regions.

Current Market Conditions

As of February 3, 2026, the EUR/GBP exchange rate is around 0.8450, reflecting a year of diverging monetary policies that began taking shape in early 2025. At that time, the exchange rate stabilized near 0.8630, with both the BoE and ECB expected to hold rates steady. The main difference was the BoE’s plans for easing compared to the ECB’s neutral position. The cautious outlook on the BoE’s ability to cut rates in 2025 turned out to be accurate, as UK inflation remained high throughout the year. The inflation alert we raised in December 2024, which recorded 3.4%, was not temporary; the latest data from December 2025 showed UK CPI at 3.8%. This led the BoE to change its approach, increasing the policy rate to 4.25% to regain credibility. In contrast, the Eurozone’s inflation situation has been more manageable, aligning with early 2025 predictions. The recent flash Harmonized Index of Consumer Prices for January 2026 indicated a rate of 2.1%, comfortably within the ECB’s target range. This has allowed the ECB to begin a modest easing cycle, reducing its deposit rate to 1.75%. Given this ongoing policy gap, strategies that benefit from a stable or declining EUR/GBP are favorable in the coming weeks. With 1-month implied volatility at a low 4.8%, selling out-of-the-money EUR/GBP call options to earn premium looks appealing. This strategy takes advantage of the expectation that significant weakness in the pound is unlikely while UK rates remain high. The primary risk to this outlook is the increasing strain on the UK economy, which may prompt the BoE to change course. UK GDP only grew by 0.1% in the last quarter of 2025, and early indicators for 2026 suggest a possible contraction. Therefore, traders might consider using put options on EUR/GBP as a hedge against unexpected dovish statements from the BoE that could prioritize growth over inflation. Create your live VT Markets account and start trading now.

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