EUR/GBP traded higher near 0.8665 in early European trade on Tuesday, as the Pound weakened amid UK political instability. Markets awaited the ZEW surveys for Germany and the Eurozone due later in the day.
UK Prime Minister Keir Starmer faced calls to set a date for leaving office after local elections brought heavy losses for the Labour Party. Starmer said he would not resign, while UK gilt yields also added pressure to the Pound.
The Euro found support from expectations of tighter European Central Bank policy. ECB Governing Council member Martin Kocher said there was no need to delay rate rises if energy prices did not improve quickly.
ECB Executive Board member Isabel Schnabel said companies and households were responding in a worrying way to rising global energy prices. Markets priced a 92% chance of a 25 basis point hike in June, and expected three hikes by end-2026, according to Reuters.
We are seeing the EUR/GBP pair climb towards 0.8665, a move powered by clear political and economic differences. The British Pound is weakening due to political uncertainty surrounding Prime Minister Starmer, while the Euro is strengthening on the European Central Bank’s firm talk of raising interest rates. This divergence is creating a strong upward trend that we can expect to continue.
The pressure on the Prime Minister is significant following the Labour party’s recent loss of over 450 council seats in the May local elections. This political instability is being reflected in bond markets, where we have seen UK 10-year gilt yields rise to 4.3% as investors demand a higher premium for the risk. This environment makes holding long sterling positions unattractive for the time being.
Meanwhile, the Euro is gaining support from an increasingly aggressive ECB. With the latest Eurozone inflation data showing a persistent 3.1% year-over-year, officials have little choice but to signal rate hikes to combat rising prices. Financial markets are now pricing in a 92% chance of a 25 basis point hike at the June meeting, a stark contrast to the Bank of England, which is widely expected to hold rates steady.
For derivative traders, this situation suggests positioning for continued upward movement in EUR/GBP. Implied volatility on one-month options for the pair has ticked up to 7.2%, indicating that the market expects larger price swings in the near future. This makes buying call options or using bull call spreads an effective way to capitalize on further Euro strength while managing risk.
When we look back at this time in 2025, the political situation in the UK was far more settled, and the ECB was still signaling patience on rate policy. The EUR/GBP pair was trading in a much tighter range around the 0.8500 level. The current breakout above key resistance at 0.8600 marks a significant change from last year’s market conditions.
Looking ahead, the immediate focus will be on the German ZEW Economic Sentiment survey due later today, where a strong reading would further boost the Euro. Traders should also watch for any more statements from ECB officials ahead of their June policy meeting. A confirmed rate hike next month could easily see the EUR/GBP cross test the 0.8700 level in the coming weeks.
