EUR/GBP gains as UK political uncertainty, BoE easing pressure Pound

EUR/GBP moves higher and trades around 0.8720 on Thursday at the time of writing, up 0.13% on the day. The pair benefits from renewed weakness in the Pound Sterling (GBP) amid political uncertainty in the United Kingdom (UK), while the Euro (EUR) remains relatively stable despite softer inflation data in the Eurozone.

In the UK, market attention is focused on the Gorton and Denton by-election, seen as an important test for Prime Minister Keir Starmer. According to ING, a heavy defeat for the Labour Party could reignite speculation about the party’s leadership and weigh further on the Pound Sterling. Rabobank also highlights that the increasing fragmentation of the UK political landscape could add to currency volatility if the result delivers an unexpected outcome.

At the same time, expectations of monetary easing from the Bank of England (BoE) continue to limit the Pound Sterling’s rebound potential. Markets are pricing in the possibility of a rate cut as early as March, against a backdrop of a cooling labor market and moderating inflationary pressures. Inflation, as measured by the Consumer Price Index (CPI), declined to 3% YoY in January from 3.4% in December, reinforcing expectations of a more accommodative stance. Some Monetary Policy Committee (MPC) members, such as Alan Taylor, have signaled the need for two to three rate cuts in the near term, while acknowledging persistent risks stemming from services inflation.

In the Eurozone, recent data show that annual inflation slowed to 1.7% in January, its lowest level since September 2024. European Central Bank (ECB) President Christine Lagarde stated before the European Parliament that the institution’s efforts to bring inflation back toward the 2% target are proving effective and that stabilization around this objective is expected in the medium term. She nevertheless emphasizes the need to maintain a data-dependent and agile approach in response to evolving economic conditions.

These remarks reinforce the scenario of a prolonged pause from the ECB, limiting immediate fundamental support for the Euro. Confidence indicators in the Eurozone remain mixed, with the Economic Sentiment declining in February, suggesting that the recovery remains fragile.

Overall, the current EUR/GBP dynamics reflect more the vulnerability of the Pound Sterling to political uncertainty and rate cut expectations than a clear resurgence in Euro strength. Investors are now closely watching upcoming German inflation data, which is due on Friday, as well as any political developments in the United Kingdom that could amplify volatility in the pair.