The Euro stayed strong against the Pound on Thursday. Hopes of Bank of England (BoE) rate cuts kept Sterling under pressure. EUR/GBP traded near 0.8737, slipping slightly after nearly touching 0.8750.
New UK inflation data strengthened the case for rate cuts. CPI fell 0.5% month-on-month in January, after rising 0.4% in December. Annual CPI slowed to 3.0% from 3.4%.
Uk Inflation And Jobs Data
Core CPI edged down to 3.1% year-on-year from 3.2%. UK labour market data also weakened. Employment rose by 52K in the three months to December, down from 82K previously.
The ILO unemployment rate climbed to 5.2%, the highest level since early 2021. BoE policymaker Catherine Mann said inflation could return to 2% within three to four months.
Markets are now pricing in easing as early as the BoE’s March meeting, with close to two more cuts expected later in 2025. In the Eurozone, uncertainty rose mid-week after reports suggested ECB President Christine Lagarde might leave before October 2027.
Those worries eased after Reuters reported Lagarde told colleagues she remains focused on her role. Markets expect the ECB to keep rates unchanged through 2026, as inflation sits near 2%.
Focus Turns To Upcoming Data
Attention now turns to Friday’s UK Retail Sales and the preliminary PMI figures for the UK and Eurozone.
Earlier in 2025, the Pound weakened as investors started to price in BoE rate cuts. That shift was driven by lower inflation and a cooler UK jobs market. As a result, EUR/GBP stayed supported, trading around 0.8740.
Since then, the BoE delivered two rate cuts in 2025, taking its base rate down to 4.75%. However, the January 2026 inflation print surprised to the upside, rising to 2.8%. That makes further easing less straightforward. With prices still firm and unemployment elevated at 4.5%, the Pound no longer looks set for a clear, steady decline.
As expected, the European Central Bank kept policy steady, holding its main rate at 4.50% throughout 2025. Eurozone inflation has also stayed sticky, with January 2026 at 2.5%. Talk last year about Lagarde leaving early came to nothing, and the ECB remains focused on its inflation mandate.
The clear policy gap that supported the Euro against the Pound last year has narrowed. With EUR/GBP already having climbed toward 0.8950, it may make sense to look at approaches that can benefit from a move into a range, such as selling volatility via short straddles. Traders could also consider short-dated GBP puts as a hedge, in case weaker-than-expected UK data brings rate-cut bets back quickly.
February’s preliminary PMI data will be key. A sharp drop in the UK’s services sector, which makes up close to 80% of the economy, could push the BoE to lean more dovish and weigh on the Pound. On the other hand, continued resilience in the Eurozone would support the ECB’s wait-and-see stance.
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