EUR/GBP rose to around 0.8715 in early European trade on Thursday, moving above 0.8700. The pair climbed as UK political risk pressured the Pound. Markets were also focused on a speech from ECB President Christine Lagarde later in the day. Manchester’s Gorton and Denton constituency is holding a by-election on Thursday to fill a vacant seat. Investors are watching the vote as a key test for Prime Minister Keir Starmer, following reports of internal party tensions and low approval ratings.

Eurozone Inflation And ECB Focus

In the Eurozone, inflation slowed to 1.7% year on year in January, the lowest in 16 months. Traders are also waiting for Germany’s preliminary CPI on Friday, which could shift expectations for ECB policy. The Pound Sterling dates back to 886 AD and is the UK’s official currency, issued by the Bank of England. It is the fourth most traded currency and accounts for about 12% of global FX turnover, or roughly $630 billion a day (2022 data). Major Sterling pairs include GBP/USD (11% of FX turnover), GBP/JPY (3%), and EUR/GBP (2%). Sterling is driven by Bank of England policy, which targets inflation near 2%, and by data such as GDP, PMIs, employment figures, and the trade balance. At this time in 2025, EUR/GBP was pushing above 0.8700, mainly due to political uncertainty around the UK government. The Manchester special election was viewed as a major test for the Prime Minister, adding pressure to the Pound. Concerns about domestic stability were a key headwind for the currency.

Shift In The 2026 Policy Divergence

Fast forward to today, February 26, 2026, and the picture has changed. The pair is now trading closer to 0.8650. UK inflation, reported last week for January, remains sticky at 2.5%. This keeps pressure on the Bank of England to hold its 5.25% bank rate. That is different from a year ago, when Eurozone inflation was falling quickly. In the Eurozone, inflation has steadied. The latest Harmonised Index of Consumer Prices (HICP) for the euro area is 1.9%. With inflation near the ECB’s target, markets see a higher chance the ECB cuts rates before the Bank of England does. This expected policy gap is now the main driver of the pair. For derivatives traders in the weeks ahead, this points to a volatility trade. With both central banks staying data-dependent, buying option straddles ahead of the March policy meetings may be a practical way to capture a sharp move. A straddle benefits if price moves strongly in either direction, which could happen if one bank signals a clearer path than the other. The next data releases will matter. Traders will focus on preliminary February inflation prints and the UK’s annual budget statement. Any surprise in UK wage growth or German economic sentiment could break the current tight range. One-month option implied volatility has risen from 5.2% to 5.8% over the past week, suggesting the market is preparing for a larger move. Create your live VT Markets account and start trading now.

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