EUR/GBP Rises as UK Politics Pressure Sterling

Key Moments

EUR/GBP trades near 0.8750 in early European dealings as the Euro outperforms a softer Pound Sterling.
UK political uncertainty and increased expectations of Bank of England rate cuts pressure GBP.
Traders focus on Germany’s preliminary CPI release, which could influence European Central Bank rate expectations and near-term EUR/GBP direction.

EUR/GBP Supported by Softer Pound in Early Europe

The EUR/GBP cross is trading firmly in positive territory near 0.8750 during the early European session on Friday. The Euro is gaining ground against the Pound Sterling as the UK currency comes under pressure from renewed political uncertainty and growing expectations of monetary easing by the Bank of England (BoE). Market participants are also positioning ahead of Germany’s preliminary Consumer Price Index (CPI) inflation figures, scheduled for release later on Friday.

UK Political Tension Adds Pressure to Sterling

Sterling sentiment has been dented following a surprise result in the Gorton and Denton byelection. According to the Guardian, the Green Party secured a landmark win, dealing what is described as a significant setback to Keir Starmer. Hannah Spencer captured the seat from Labour, marking the Greens’ first-ever Westminster by-election victory.

The defeat for Labour raises the prospect of leadership speculation, which could further undermine confidence in the Pound Sterling. Heightened political noise often leads investors to demand a higher risk premium for UK assets, adding to the downward bias in GBP.

BoE Rate Cut Expectations Build

In parallel, market pricing for BoE easing is exerting additional downward pressure on the Pound. Governor Andrew Bailey commented on Tuesday that an interest rate reduction in March is a
“genuinely open question,” while acknowledging that recent services price inflation has not moderated as much as policymakers had hoped.

Economists at several major financial institutions, including Deutsche Bank, ING, and UBS, anticipate that the next rate cut could come at either the March or April policy meeting. These expectations of earlier policy easing diminish the relative yield appeal of GBP and help keep EUR/GBP supported near the 0.8750 level.

German CPI in Focus for ECB Outlook

Attention is now turning to the preliminary German CPI inflation data, which will be a key event for markets on Friday. The figures are expected to influence views on the European Central Bank’s next policy steps.

A downside surprise in German inflation would strengthen the case for further ECB rate cuts aimed at supporting economic growth. Such a shift could, in turn, weigh on the Euro and potentially limit EUR/GBP gains or even drag the cross lower against the Pound in the near term, depending on the magnitude of the market reaction.

Factor	Potential Impact on EUR	Potential Impact on GBP	Implication for EUR/GBP
UK political uncertainty	Neutral	Negative	Supports upside in EUR/GBP
BoE rate cut expectations	Neutral	Negative	Supports upside in EUR/GBP
German CPI downside surprise	Negative	Neutral	Could weigh on EUR/GBP in the near term

Understanding the Pound Sterling

The Pound Sterling (GBP) is described as the oldest currency in the world, dating back to 886 AD, and serves as the official currency of the United Kingdom. It is characterized as the fourth most traded currency in global foreign exchange markets, representing 12% of all transactions with an average daily turnover of $630 billion, based on 2022 data.

Key GBP currency pairs highlighted include GBP/USD, commonly referred to as “Cable,” which accounts for 11% of FX turnover, GBP/JPY, known among traders as the “Dragon” with a 3% share, and EUR/GBP, which represents 2% of transactions. The Bank of England is the issuer of the Pound Sterling.

Role of the Bank of England in Shaping GBP

Monetary policy set by the Bank of England is identified as the dominant driver of the Pound’s value. The BoE’s primary mandate is “price stability,” interpreted as maintaining inflation at around 2%. The central bank’s main instrument for achieving this objective is the adjustment of interest rates.

When inflation rises above target, the BoE seeks to contain it by increasing interest rates, making borrowing more expensive for households and businesses. This is typically considered supportive for GBP, as higher rates can attract global capital flows into UK assets. Conversely, when inflation falls too low and signals slowing economic momentum, the BoE may lower interest rates to reduce borrowing costs and encourage investment, which can be negative for the currency.

Economic Data and Trade Balance as Drivers of Sterling

Macroeconomic releases are also cited as influential for the Pound’s direction. Indicators such as gross domestic product (GDP), Manufacturing and Services Purchasing Managers’ Indexes (PMIs), and labor market data all provide insight into the health of the UK economy and can affect GBP.

Stronger data outcomes tend to support Sterling by drawing in foreign investment and by potentially prompting the BoE to consider tighter policy. Conversely, weaker figures generally exert downward pressure on the currency.

The trade balance is highlighted as another important metric. This measure captures the difference between export revenues and import spending over a given period. A positive trade balance – where exports exceed imports – tends to support the currency through additional demand from foreign buyers. A negative balance, in contrast, can act as a drag on the currency’s performance.