The Euro slipped against the Pound on Monday, with EUR/GBP giving up earlier gains as traders avoided large positions before the European Central Bank (ECB) and Bank of England (BoE) rate decisions later this week. The pair traded near 0.8636 after failing to hold above 0.8650. The policy meetings on Thursday come while the US-Iran war continues to unsettle energy markets and lift Oil prices. Higher energy costs may raise inflation pressure in the Eurozone and the UK, affecting the rate outlook for both central banks.

Central Bank Decisions In Focus

The ECB is expected to keep rates unchanged, with the Deposit Facility Rate at 2.00%, the Main Refinancing Operations Rate at 2.15%, and the Marginal Lending Facility at 2.40%. Attention is expected to move to Christine Lagarde’s guidance, with markets pricing in a rate rise by July. High Oil prices may also weigh on Eurozone growth because the region relies on imported energy. Lagarde said the ECB will act to prevent the conflict from causing an inflation shock like the one after Russia’s invasion of Ukraine. In the UK, markets now expect the BoE to hold the Bank Rate at 3.75%, after earlier pricing nearly an 80% chance of a cut. Markets are also pricing the chance of a rate rise by year-end, alongside weak growth and ongoing inflation risks. Eurozone inflation data is due on Wednesday, and the UK labour market report is scheduled for Thursday.

Looking Back At 2025

We are currently seeing the EUR/GBP pair trade around 0.8550, which is a noticeable shift from the levels around 0.8636 we saw at this time last year. Looking back to March 2025, we remember the market’s hesitation ahead of key central bank meetings. That period taught us how quickly geopolitical events, like the US-Iran conflict at the time, can change interest rate expectations. The inflation shock from rising energy prices in 2025 was real, pushing Eurozone HICP inflation to a peak of 3.4% in the third quarter before it began to recede. We saw the ECB follow through on market expectations, delivering a 25 basis point hike in July 2025. This move, however, was tempered by concerns over slowing industrial production in Germany, which limited further hawkishness. In the UK, the Bank of England surprised us by holding rates steady throughout 2025, despite the inflation pressure. The feared rate hike never materialized as Q4 2025 GDP growth came in at a dismal 0.1%, confirming that the weak economy couldn’t handle higher borrowing costs. This divergence in policy, with the ECB hiking and the BoE staying put, contributed to the pound’s relative strength over the past year. Given this history, we should consider buying volatility in the coming weeks using options straddles on EUR/GBP. Current implied volatility is relatively low at 6.2%, but with both central banks now signaling a pivot towards easing in mid-2026, any disagreement on the timing could cause a sharp move. The market is pricing a 65% chance of an ECB cut by June, but only a 40% chance for the BoE, creating a clear point of potential divergence. This means we should also look at forward rate agreements to position for the BoE remaining more hawkish, or less dovish, than the ECB. The lesson from 2025 is that weak UK growth can stay the BoE’s hand, so these positions must be hedged. We can use short-dated put options on the EUR/GBP to protect against any sudden sterling weakness if UK labor or inflation data comes in unexpectedly poor. Create your live VT Markets account and start trading now.

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