The Euro edged slightly lower against the Pound on Wednesday, but it kept most of its recent gains. EUR/GBP stayed close to 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. The story then spread to Starmer. Some reports said the calls for Starmer to step down now include members of his own cabinet.
With few UK data releases early in the week, politics drove the market. The Pound was one of the weakest major currencies. The Euro held up better, helped by the European Central Bank’s recent hawkish tone.
Focus now shifts to the UK’s preliminary Q4 GDP release on Thursday. Growth is expected to slow to 1.2% annualised, from 1.3% in the prior quarter. Manufacturing Production is expected to be flat in December.
In the Eurozone, there is little top-tier data scheduled. Instead, ECB messaging has been the main support for the Euro. Christine Lagarde said inflation should settle around 2% and played down the latest low CPI readings.
On Tuesday, Vice President Luis de Guindos said the Euro’s recent rise was not dramatic. His comments suggested interest rates could stay unchanged for a while.
UK political turmoil is the main reason for the Pound’s weakness. With rising calls for the Prime Minister to resign, uncertainty has increased. That uncertainty is pushing EUR/GBP back toward the 0.8745 area.
This instability echoes the market reaction during the 2022 mini-budget crisis, when GBP fell to record lows. The backdrop also looks difficult. Data from late 2025 showed UK inflation still high at 4.0%. At the same time, Thursday’s GDP report is expected to confirm slower growth. Together, this points to a stagflation-style setup that is negative for the Pound.
By contrast, the Euro is getting support from a firm ECB. January 2026 inflation was 2.8%, still above the ECB’s 2% target. That gives the ECB room to stay hawkish and makes near-term rate cuts less likely.
With political risk high, we expect implied volatility for the Pound to rise in the coming weeks. Traders may want to use options to prepare for bigger-than-normal moves. For example, buying EUR/GBP call options can capture further upside while limiting downside risk.
A more direct strategy is to short GBP futures, betting on further weakness versus other major currencies. The split is clear: the UK faces political risk and slower growth, while the Eurozone has a central bank focused on inflation. This gap supports a bearish view on Sterling.
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