Euro Gains vs Pound as ECB, BoE Policy Outlook Diverges

Key Moments

EUR/GBP Edges Higher After Central Bank Decisions

EUR/GBP moves slightly higher on Friday, clawing back losses from the previous session as investors reassess the latest monetary policy decisions from the European Central Bank (ECB) and the Bank of England (BoE). At the time of writing, the pair is trading around 0.8647, remaining locked within the relatively narrow band that has dominated trading for more than a week.

The Euro (EUR) is outperforming the British Pound (GBP) on Friday amid expectations that the ECB could tighten policy earlier than previously anticipated, even as markets continue to discount multiple rate increases from the BoE.

ECB and BoE Hold Rates, Highlight Inflation Risks

On Thursday, both the ECB and the BoE kept their benchmark interest rates unchanged, at 2% and 3.75%, respectively. Policymakers in both regions underscored rising inflation risks, citing the impact of higher Oil and energy prices in the context of the ongoing US-Israel war with Iran.

The ECB reiterated that it is not locked into any predetermined path for interest rates, emphasizing that future moves will be guided by the inflation outlook and associated risks. The BoE provided only limited forward guidance, stating it “stands ready to act as necessary to ensure that inflation remains on track to meet the 2% target in the medium term.”

ECB Projections Signal Weaker Growth and Stronger Price Pressures

The ECB’s latest projections reflect a more uncertain economic backdrop. For 2026, the central bank’s baseline scenario foresees growth at 0.9%. Under an adverse scenario, growth is projected at 0.6%, falling further to 0.4% in a severe scenario.

At the same time, inflation is expected to accelerate. In the baseline projection for 2026, inflation is seen at 2.6%, rising to 3.5% in the adverse scenario and 4.4% in the severe case. These projections emphasize the risk that economic activity could slow while price pressures continue to build.

BoE Inflation Outlook Revised Higher

The BoE has also adjusted its inflation projections upward. The central bank now expects the Consumer Price Index (CPI) to average around 3% in Q2 2026, an increase from the 2.1% level assumed in its February forecasts.

Both the Eurozone and the UK are net importers of energy, leaving them vulnerable to cost pressures stemming from elevated Oil and energy prices. These dynamics can both lift inflation and dampen growth, reinforcing stagflation concerns. The ECB currently appears to have relatively more room to maneuver, with inflation still close to its 2% objective. In contrast, UK inflation remains above the BoE’s target, limiting the scope for more forceful tightening in response to an Oil-driven inflation shock.

Rate Expectations Diverge Between ECB and BoE

Market pricing now fully reflects an additional ECB rate increase by July, along with another move by the end of the year, and some analysts have flagged a potential hike as early as April. In the UK, investors anticipate more than two BoE hikes over the year, with roughly a 50% probability assigned to a move in April.

On Friday, ECB Governing Council member Gabriel Makhlouf said that “two rate hikes are part of the ECB’s baseline scenario,” and added that “if facts point to action, the ECB will take action.” Madis Müller commented that “a rate hike may be appropriate if inflation is persistent,” while Bundesbank President Joachim Nagel stated that the ECB “would need an April hike if the price outlook sours.”