EUR/GBP traded around 0.8694 on Wednesday, moving sideways after two days of falls. The Euro mildly outperformed the Pound as markets followed Middle East news and possible renewed US-Iran talks.
Reports said a second round of talks could happen as early as this week, ahead of the end of a two-week ceasefire. US President Donald Trump said the “Iran war can be over very soon” in an interview with Fox Business.
Geopolitical Risk And Energy Prices
Risk mood improved, but tension remained around the Strait of Hormuz during an ongoing US naval blockade. The Washington Post reported that the Pentagon is preparing to deploy thousands of extra troops to the Middle East in the coming days.
Markets also weighed oil-linked inflation and what it could mean for ECB and BoE interest rates. Higher energy prices led traders to price in possible rate rises from both central banks.
Eurozone inflation was described as more contained than in the UK, which supported the Euro. If oil prices fall on progress in US-Iran talks, pressure to tighten policy could ease, with the BoE seen as more likely to move towards easier policy than the ECB.
Eurozone Industrial Production rose 0.4% month-on-month in February, beating forecasts of 0.3% and reversing a -0.8% fall. Later, ECB and BoE officials are due to speak, with UK February GDP and Eurozone inflation data due on Thursday.
Looking Back To 2025
Looking back to 2025, we saw the market fixated on a potential US-Iran deal and its effect on oil prices, which kept EUR/GBP trading near 0.8700. Today, the focus has shifted from that specific geopolitical flashpoint to the stubborn inflation it left behind, especially in the UK. The cross is now sitting lower around 0.8550 as we weigh who will cut interest rates first.
The key divergence we anticipated last year is now playing out, but not exactly as predicted. UK inflation remains stubbornly high, with the latest figures for March 2026 showing CPI at 3.2%, well above the Bank of England’s target. In contrast, Eurozone inflation has cooled more effectively, currently standing at 2.4%, giving the European Central Bank more room to maneuver.
This inflation gap means the market is pricing in fewer rate cuts from the Bank of England this year compared to the ECB. We are seeing derivative markets price in roughly 50 basis points of cuts from the BoE by year-end, versus nearly 75 basis points from the ECB. This policy divergence should continue to support the Euro against the Pound.
Recent economic data reinforces this view of relative weakness in the United Kingdom. The UK just posted a weak GDP reading for February 2026, showing growth of only 0.1% and highlighting ongoing stagflationary pressures. Meanwhile, Eurozone industrial production has shown modest signs of stabilization, preventing a more pessimistic outlook.
For derivative traders, this suggests positioning for EUR/GBP to grind higher in the coming weeks. Buying call options on EUR/GBP with expirations in the next one to three months could be a viable strategy to capitalize on this expected move. This protects against the downside while offering exposure to the upside potential driven by the central bank policy gap.
While the specific Iran tensions of 2025 have faded, we must remain watchful of any new energy shocks that could disrupt this outlook. A sudden spike in oil prices would complicate the picture for both central banks, but it would likely hit the fragile UK economy harder. Therefore, the broader bias for a stronger Euro relative to the Pound remains intact for now.
