The EUR/GBP exchange rate has dropped close to 0.8700 due to rising tensions between Ukraine and Russia. This decline happened during early European trading as uncertainty in the region affects market sentiment, while the Bank of England (BoE) remains cautious about its monetary policy. In 2026, Russia accuses Ukraine of launching daily drone strikes on Moscow, with Ukraine’s goal being to disrupt Russian military and infrastructure. The ongoing conflict, which is entering its fourth year, continues to impact markets. Additionally, the Eurozone’s past dependency on Russian energy complicates the Euro’s performance against the GBP.

Monetary Easing and Market Impact

The Bank of England is looking to ease monetary policy gradually, which helps the GBP but poses challenges for EUR/GBP. In December, the BoE reduced interest rates from 4.0% to 3.75%, marking the lowest point in almost three years. There’s a possibility of more rate cuts later this year. Pound Sterling is crucial in global trade, with £630 billion transacted daily. The BoE’s policies affect the currency’s value, targeting an inflation rate around 2%. Economic data and trade balances also play a significant role in its movement. Currently, the EUR/GBP exchange rate is nearing 0.8700 as ongoing geopolitical tensions from the Ukraine-Russia conflict weigh heavily on the Euro. For example, European natural gas futures have risen by over 8% in the first few trading days of January due to worries about potential supply issues. In contrast, the Pound has shown a more stable outlook.

Upcoming Data and Trading Strategies

Everyone should pay attention to the preliminary German Consumer Price Index (CPI) data expected tomorrow. If inflation figures are lower than anticipated, this could boost expectations for earlier rate cuts from the European Central Bank (ECB), putting more pressure on the Euro. This scenario has played out before, as the final Q4 2025 Eurozone Harmonized Index of Consumer Prices (HICP) report revealed inflation cooling to 2.5%, approaching the ECB’s target. Although the Bank of England lowered rates to 3.75% last month, its approach for 2026 appears careful and gradual. After battling high inflation in 2023 and 2024, the central bank seems reluctant to make significant policy changes too quickly. This cautious path provides support for the Pound, especially compared to a Euro facing more immediate challenges. In this context, traders in derivatives might think about buying EUR/GBP put options, expecting the exchange rate to fall below the 0.8700 support level. These options allow a defined-risk strategy to profit from potential downside if German CPI data disappoints. Another strategy could involve selling out-of-the-money call spreads, which would benefit if the exchange rate remains below a specific level in the coming weeks. Create your live VT Markets account and start trading now.

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