EUR/GBP traded near 0.8716 on Wednesday and fell for a fourth straight day after new Eurozone inflation data and Germany’s Q4 GDP report. Eurostat’s final estimates showed the Harmonised Index of Consumer Prices (HICP) rose 1.7% year-on-year in January, down from 2.0% in December and the lowest level in 16 months. This was the first final reading below the ECB’s 2% target since May 2025. On the month, HICP fell 0.6%.

Eurozone Inflation And ECB Outlook

Core HICP fell 1.1% in January after rising 0.3% in December. Year-on-year, core inflation eased to 2.2% from 2.3%. Markets still expect the ECB to keep rates unchanged through 2026. ECB President Christine Lagarde said on Monday, “I very strongly believe that we are in that good place.” Germany’s economy grew 0.3% quarter-on-quarter in Q4, in line with forecasts and the prior reading. Annual GDP growth was 0.4%, also matching expectations.

BoE Cut Expectations And Trade Implications

In the UK, focus shifted to the Bank of England, where markets see a possible rate cut in March. Governor Andrew Bailey told Parliament’s Treasury Committee that a cut is a “genuinely open question,” and that decisions will depend on inflation and wage data. With Eurozone inflation down to 1.7% in January—well below the ECB’s target—we see little reason for the European Central Bank to change course. This supports President Lagarde’s view that policy is in a “good place” and strengthens expectations that rates will stay on hold for some time. Steady German GDP growth also reduces any near-term pressure on the ECB to act. The main divergence now is the rising expectation that the Bank of England could cut rates, potentially as soon as March. Governor Bailey’s comments have left the door open, and markets are adjusting. Overnight Index Swaps now price in more than a 60% chance of a 25 basis point cut next month. This sets up a clear trade theme: the Euro has support from a stable policy outlook, while the Pound faces near-term easing risk. That gap could push EUR/GBP higher in the coming weeks. The current move below 0.8720, driven by the softer inflation print, may offer a potential entry point. We should consider using options—such as EUR/GBP call spreads—to position for a rebound while limiting downside risk. A similar policy split emerged in late 2024, when early speculation about central bank pivots created strong trends for those positioned early. The key data to watch now are the next UK inflation and wage releases. If last month’s core UK inflation of 3.9% continues to cool, expectations for a March cut should strengthen and could lift the pair. Meanwhile, early-February PMI data showed the Eurozone services sector remains resilient, while manufacturing is still contracting. This supports the disinflation trend and reinforces our view that the ECB will stay on hold even as the BoE starts cutting. This policy gap remains the central theme to trade. Create your live VT Markets account and start trading now.

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