The EUR/GBP pair rose to approximately 0.8340 following the UK Consumer Price Index (CPI) data released on Wednesday. The CPI increased by 2.8% year-over-year, below the expected 2.9% and down from January’s 3.0%.
Core CPI, excluding food and energy, was at 3.5%, lower than January’s 3.7% and below the forecasted 3.6%. The Bank of England’s decision to keep interest rates unchanged at 4.5% added to the Pound Sterling’s challenges.
Euro Facing Interest Rate Uncertainty
While the Euro is facing pressures from potential interest rate cuts by the European Central Bank, future gains for EUR/GBP may be limited. Expectations indicate the deposit rate could drop to 2% by the end of summer.
The lower-than-expected inflation data from the UK has played a role in the Pound losing strength, particularly as markets had anticipated a slightly higher figure. A reading of 2.8% for headline CPI suggests that price pressures are cooling faster than some had expected, reinforcing the argument for eventual rate cuts by the Bank of England. Core inflation, which strips out volatile components like food and energy, also eased more than predicted. That hints at a broader softening in inflationary momentum, which can often influence monetary policy decisions more directly than headline figures.
With interest rates remaining unchanged at 4.5%, Sterling has struggled to find support. The decision not to adjust rates came as no surprise, but with inflation now trending lower, speculation about a possible cut later in the year will persist. A weaker inflation outlook tends to erode the appeal of a currency, especially when investors start factoring in the possibility of reduced yields on deposits or bonds.
On the Euro’s side, expectations of rate reductions by the European Central Bank are keeping sentiment cautious. Market pricing indicates that the deposit rate could potentially drop to 2% by late summer. If that happens, it would bring borrowing costs in the Eurozone lower, which can typically weigh on the currency. That being said, traders will need to consider whether the ECB moves more aggressively or takes a measured approach. A faster easing cycle than the Bank of England’s could limit the Euro’s strength against Sterling.
Market Reactions And Future Expectations
For those trading derivatives, these macroeconomic shifts create clear levels to monitor. The EUR/GBP pair has edged higher, but the broader trend will depend on how both central banks communicate their next moves in the coming weeks. If the UK reports further declines in inflation, that could lead to intensified discussions around rate cuts, especially if growth data also disappoints. Conversely, if inflation proves stickier, markets may rethink expectations, lending some strength back to the Pound.
Volatility could remain elevated as traders reassess their forecasts. Positioning ahead of central bank meetings might become more pronounced, as uncertainty around monetary policy typically leads to sharper price swings. Understanding how interest rate expectations shift within each economy will be useful when analysing the next moves in the pair.
