EUR/GBP traded near 0.8716 on Wednesday. It 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. That was down from 2.0% in December and the lowest level in 16 months. It was also 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 a 0.3% rise in December. Year-on-year, core inflation eased to 2.2% from 2.3%. Markets still largely 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, matching forecasts and the prior reading. Annual GDP growth was 0.4%, also in line with expectations.

BoE Cut Expectations And Trade Implications

In the UK, focus shifted to the Bank of England. 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 central bank to change its steady approach. This supports President Lagarde’s view that policy is in a “good place,” and it reinforces expectations that rates will stay unchanged for some time. Steady German GDP growth also reduces any near-term pressure on the ECB to act. The bigger shift is in the UK. Expectations for a Bank of England cut are rising, possibly as soon as March. Governor Bailey’s comments have left the door open, and market pricing has adjusted. Overnight Index Swaps now point to more than a 60% chance of a 25 basis point cut next month. This creates a clear setup: the Euro has a stable policy base, 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 soft inflation print, may therefore offer a strategic entry point. We should consider options, such as buying EUR/GBP call spreads, to position for a rebound while limiting downside risk. A similar policy split appeared in late 2024, when early speculation about central bank pivots created strong trends for traders who positioned early. The key releases to watch now are the next UK inflation and wage reports. If last month’s UK core 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 Eurozone services remain steady, while manufacturing is still contracting. This supports the disinflation trend. It also backs our view that the ECB will stay on hold even after the BoE begins cutting. This policy gap is the main theme we should trade. Create your live VT Markets account and start trading now.

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