EUR/GBP flat lines near 0.8650 ahead of German CPI inflation release

EUR/GBP holds steady around 0.8655 in Tuesday’s early European session.
Rising bets that the BoE will follow a gradual monetary easing cycle in 2026 support the Pound Sterling.
Traders await the preliminary reading of German CPI inflation later on Tuesday.

Lallalit Srijandorn FXStreet

The EUR/GBP cross trades on a flat note near 0.8655 during the early European trading hours on Tuesday. However, the potential upside for the cross might be limited as the Bank of England (BoE) guided that the monetary policy will remain on a gradual downward path, lifting the Pound Sterling (GBP). The preliminary reading of the German Consumer Price Index (CPI) inflation will be published later on Tuesday.

The UK central bank stated in its last policy meeting of 2025 that the monetary policy will remain on a “gradual downward path” after cutting the interest rates by 25 basis points (bps) to 3.75% in the December policy meeting. This, in turn, could provide some support to the GBP and act as a headwind for the cross. Money markets expect the BoE to deliver at least one rate reduction in the first half of the year and are pricing in nearly a 50% chance of a second cut before the year-end, according to Reuters.

Rising geopolitical tensions between Ukraine and Russia might weigh on sentiment around the Euro (EUR) against the GBP, as the Eurozone is heavily dependent on Russian oil and natural gas imports. Russia’s defence ministry claimed that Ukraine has targeted Moscow with drones every day of 2026 so far. Ukraine says such attacks aim to disrupt military logistics and energy infrastructure, raise costs for Moscow’s war effort, and respond to repeated Russian missile and drone attacks in the war that Russia launched nearly four years ago.

Traders will take more cues from the flash reading of the CPI inflation report from Germany later in the day. The German CPI is expected to show an increase of 0.2% MoM in December, while the Harmonized Index of Consumer Prices is projected to show a rise of 0.4% MoM during the same period. Any signs of hotter inflation in Germany could underpin the EUR in the near term.

Pound Sterling FAQs

What is the Pound Sterling?

The Pound Sterling (GBP) is the oldest currency in the world (886 AD) and the official currency of the United Kingdom. It is the fourth most traded unit for foreign exchange (FX) in the world, accounting for 12% of all transactions, averaging $630 billion a day, according to 2022 data. Its key trading pairs are GBP/USD, also known as ‘Cable’, which accounts for 11% of FX, GBP/JPY, or the ‘Dragon’ as it is known by traders (3%), and EUR/GBP (2%). The Pound Sterling is issued by the Bank of England (BoE).

How do the decisions of the Bank of England impact on the Pound Sterling?

The single most important factor influencing the value of the Pound Sterling is monetary policy decided by the Bank of England. The BoE bases its decisions on whether it has achieved its primary goal of “price stability” – a steady inflation rate of around 2%. Its primary tool for achieving this is the adjustment of interest rates. When inflation is too high, the BoE will try to rein it in by raising interest rates, making it more expensive for people and businesses to access credit. This is generally positive for GBP, as higher interest rates make the UK a more attractive place for global investors to park their money. When inflation falls too low it is a sign economic growth is slowing. In this scenario, the BoE will consider lowering interest rates to cheapen credit so businesses will borrow more to invest in growth-generating projects.

How does economic data influence the value of the Pound?

Data releases gauge the health of the economy and can impact the value of the Pound Sterling. Indicators such as GDP, Manufacturing and Services PMIs, and employment can all influence the direction of the GBP. A strong economy is good for Sterling. Not only does it attract more foreign investment but it may encourage the BoE to put up interest rates, which will directly strengthen GBP. Otherwise, if economic data is weak, the Pound Sterling is likely to fall.

How does the Trade Balance impact the Pound?

Another significant data release for the Pound Sterling is the Trade Balance. This indicator measures the difference between what a country earns from its exports and what it spends on imports over a given period. If a country produces highly sought-after exports, its currency will benefit purely from the extra demand created from foreign buyers seeking to purchase these goods. Therefore, a positive net Trade Balance strengthens a currency and vice versa for a negative balance.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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