EUR/GBP edged up to about 0.8670 in European trading on Monday after two days of declines. The move followed the release of German factory orders and industrial production figures, with Eurozone Sentix Investor Confidence due later. Germany’s industrial production fell 0.5% month-on-month in January 2026, after a downwardly revised 1.0% fall in the prior month and against expectations for a 0.9% rise. Year-on-year, production dropped 1.2% after a revised 0.4% increase in December.

German Data Weakens Euro Outlook

German factory orders fell 11.1% month-on-month in January, compared with expectations for a 4.3% decline. This followed a revised 6.4% rise in the previous reading, which had earlier been reported as 7.8%. Markets have adjusted interest rate expectations as higher energy prices feed into inflation. Concerns over a prolonged Middle East conflict have also affected sentiment around global growth. In the UK, higher energy prices have added to inflation concerns, and markets now expect no Bank of England rate cut this month. Futures pricing also points to no further policy changes for the rest of the year. UK Prime Minister Keir Starmer said the UK would not join the initial US-Israel strikes on Iran and would focus on diplomacy. US President Donald Trump said reports of a planned HMS Prince of Wales deployment were incorrect, and referred to Britain as a “once great ally”.

Policy Divergence And Trading Implications

The awful German factory data is a significant red flag for the Euro, pointing to a deepening industrial slowdown. This data, the worst we’ve seen since the energy scares of 2025, suggests the European Central Bank will be under pressure to adopt a more dovish stance. This creates a clear policy divergence against the Bank of England, which is facing a different set of problems. For the Pound, the story is about stubbornly high inflation fueled by rising energy costs from the Middle East conflict. Brent crude prices have surged over 15% in the last month to trade above $110 a barrel, all but eliminating the chance of a Bank of England rate cut. In fact, current market pricing, reflected in overnight index swaps, gives less than a 10% probability of a rate cut before the final quarter of 2026. This growing divergence between a slowing Eurozone and an inflation-bound UK makes shorting EUR/GBP an attractive proposition. We should consider buying put options to gain downside exposure with a defined risk, especially as geopolitical headlines are likely to keep volatility high. The current level around 0.8670 could serve as a solid entry point to position for a move lower. We saw a similar pattern in the latter half of 2025 when worries about energy prices forced the Bank of England to remain hawkish longer than the ECB, pushing EUR/GBP towards the 0.8500 level. A confirmed break below the 0.8600 support area in the coming weeks would signal that a similar downward trend is underway. This makes watching that technical level critical for timing new positions. Create your live VT Markets account and start trading now.

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