EUR/GBP traded near 0.8660 in early European hours on Tuesday, staying above 0.8650. Markets are waiting for the Bank of England (BoE) and European Central Bank (ECB) rate decisions due on Thursday.
The BoE is expected to leave its policy rate unchanged at 3.75% at its April meeting. The decision comes as policymakers assess risks linked to the energy crunch, alongside a weak UK labour market and limited corporate pricing power.
BoE Inflation Focus
Data has also shown firm business activity readings and UK Gross Domestic Product (GDP) growth in February. These releases have kept attention on inflation risks ahead of the BoE decision.
The ECB is also expected to keep key rates unchanged on Thursday. Markets will watch the post-meeting press conference by ECB President Christine Lagarde for guidance on possible future rate moves aimed at inflation.
Goldman Sachs forecasts two 25 basis point (bps) ECB rate rises, with one in June and another in September. This path would take the deposit rate back to 2.50%.
Looking back, we remember when EUR/GBP was trading flat around 0.8660 ahead of central bank decisions in a period of rising rates. Today, the situation has evolved, with the pair trading significantly lower near 0.8450 as both banks have since entered an easing cycle. The primary question for us now is not who will hike, but who will cut rates faster in the coming months.
Rate Cut Race
The Bank of England is now facing a different challenge than it was in the past. With UK inflation proving sticky at 2.8% in the first quarter of 2026 but GDP growth an anemic 0.2%, pressure is mounting on the BoE to stimulate the economy. This suggests the path is open for further rate cuts from the current 4.50%, which could weigh on Sterling.
Meanwhile, the European Central Bank is in a slightly better position regarding its inflation mandate. Eurozone inflation has fallen to 2.2%, much closer to the target, giving the ECB some flexibility with its own rate cuts from the current 3.50%. This creates a divergence where the BoE may need to be more aggressive with its easing policy than the ECB.
For derivative traders, this means we should anticipate rising volatility in the EUR/GBP pair. The key will be the pace of rate cuts, and any data suggesting the UK economy is weakening faster than the Eurozone could push EUR/GBP higher. Options strategies that benefit from a gradual upward move or an increase in volatility, such as buying call options on the Euro against the Pound, should be considered.
