Nomura analysts said UK wage and inflation data still point to further monetary policy convergence with the euro area. They linked this to a weakening labour market, especially slower private-sector wage growth. They also noted the UK unemployment rate has risen more than in most other developed markets.
They said some labour indicators have cooled less, such as PAYE jobs. Even so, they said the broader picture still supports easier policy. On inflation, they said headline inflation was in line with forecasts, but slightly above the Bank of England’s projection.
Services Inflation And Rate Cut Timing
They said services inflation remains more stubborn, coming in 0.25 percentage points above the Bank of England’s expectation. They said this lowers the odds of a March rate cut and could shape near-term decisions by Monetary Policy Committee members.
They said the services inflation trend still supports policy convergence with the euro area. They also said a narrowing in EUR-GBP front-end rate spreads would support EUR/GBP.
They said the next market focus is next week’s UK by-election, following Friday’s PMI data. They said a loss for the incumbent Labour Party would increase pressure on Prime Minister Starmer and raise the odds of a leadership contest.
We saw this convergence story play out during 2025, as both central banks started cutting rates. Since then, the Bank of England has lowered rates to 4.50%, while the ECB’s key rate is now 3.25%. This has reduced the gap that once supported the pound. The same trend still argues for a long EUR/GBP bias in the weeks ahead.
Sticky Services Inflation And Policy Divergence
Concerns about sticky services inflation from early 2025 still matter today. The latest UK data puts services inflation at 3.5%, well above headline CPI at 2.1%. This could slow the pace of future BoE cuts versus the ECB, where core inflation is now comfortably below 2.5%. Traders may want to consider buying medium-term EUR/GBP call options if they expect this divergence theme to strengthen.
The UK labour market has continued to soften, as we flagged last year, though only gradually. Unemployment has edged up to 4.5%. Wage growth is still solid at 4.0%, but it has clearly fallen from the highs seen in 2024. This supports the view that the BoE has room to cut further later this year, which could weigh on the pound.
Political risks highlighted in early 2025 did trigger short bursts of volatility, especially around fiscal updates. While the government has since looked more stable, trade talks with the EU are now a fresh source of uncertainty for sterling. In this setting, traders may prefer structures like bull call spreads on EUR/GBP, which limit downside while keeping exposure to upside.
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