EUR/GBP strengthens amid Eurozone sentiment boost, UK political uncertainty

EUR/GBP trades higher at the start of the week and is hovering around 0.8720 on Monday at the time of writing, up 0.38% on the day. The pair is supported by a firm Euro (EUR), following encouraging data from the Eurozone, while a deteriorating political backdrop in the United Kingdom weighs down the Pound Sterling (GBP).

The Euro is benefiting in particular from a clear improvement in investor sentiment. The Eurozone Sentix Investors’ Sentiment Index rose to 4.2 in February from -1.8 in January, marking its first positive reading since July. The survey also highlights stronger confidence in the German economy, amid hopes of a global stabilization driven by firmer growth in the United States and Asia.

Market attention is also turning to speeches from European Central Bank (ECB) policymakers, including President Christine Lagarde. However, these comments are unlikely to alter the message delivered at last week’s monetary policy meeting. The central bank kept its benchmark interest rate unchanged at 2% for a fifth consecutive meeting, and Christine Lagarde reiterated a data-dependent, meeting-by-meeting approach, without pre-committing to a specific rate path. According to a Reuters survey conducted in January, around 85% of economists expect interest rates to remain unchanged through the rest of the year.

Societe Generale analysts note that the tone from several ECB officials has turned more dovish since last week’s meeting. Some have emphasized rising downside risks to inflation, notably linked to potential disinflationary pressures from Chinese imports, while others warned that a sharp appreciation of the Euro could trigger a policy response. Nevertheless, with rates seen as close to their neutral level, the bank judges that the bar to reopening the debate on further rate cuts remains high.

On the UK side, the Pound Sterling is undermined by a fresh political crisis. The resignation of Downing Street Chief of Staff Morgan McSweeney, following the controversy surrounding the appointment of Peter Mandelson as US ambassador, has reignited concerns over government stability. This affair, combined with reports of a possible criminal investigation, has increased political uncertainty and is weighing on the British currency.

In addition, expectations of interest rate cuts by the Bank of England (BoE) continue to cap the Pound Sterling’s upside. Although the central bank recently kept its key rate unchanged at 3.75%, the number of Monetary Policy Committee (MPC) members backing a hold was lower than markets had anticipated. According to Dani Stoilova, UK and Europe economist at BNP Paribas Markets 360, the central bank could deliver its next rate cut as early as March, followed by a prolonged pause, with a terminal rate seen around 3% by mid-2027.