EUR/GBP rises as Euro gains on improved sentiment, UK data fuels BoE rate cut bets

• The Euro strengthens sharply on Tuesday, supported by a strong improvement in investor sentiment.
• German producer price data confirm easing inflationary pressures.
• UK employment figures reinforce expectations of interest rate cuts by the Bank of England.

EUR/GBP trades around 0.8720 on Tuesday at the time of writing, up 0.60% on the day, with the Euro (EUR) outperforming the Pound Sterling (GBP) after a series of supportive macroeconomic releases from the Eurozone.

In the Eurozone, the ZEW Survey released earlier in the day shows a sharp improvement in investor sentiment. Economic Sentiment in Germany rose to 59.6 in January from 45.8 in December, marking its highest level in more than four years and beating expectations of 50 by a wide margin. The index assessing the Current Situation also improved, climbing to -72.7 from -81 in the previous month, above the consensus forecast of -75.5. At the Eurozone level, the Economic Sentiment index increases to 40.8 in January from 33.7 in December, also surpassing expectations of 35.2 and reinforcing optimism about regional growth prospects.

Data published by Destatis provides additional support to the single currency. The German Producer Price Index (PPI) fell by 0.2% MoM in December, following a flat reading in November, a larger decline than the -0.1% expected. On a yearly basis, producer prices drop by 2.5%, compared with a 2.3% fall previously, confirming a continued easing of upstream inflationary pressures. This backdrop fuels the view that price pressures are steadily normalising, reinforcing expectations of a prolonged status quo at the European Central Bank (ECB).

In the United Kingdom (UK), the latest employment data for the three months ending in November weigh on the Pound Sterling (GBP). The Unemployment Rate remained unchanged at 5.1%, while a slight decline to 5% had been expected. The economy nonetheless adds 82,000 jobs over the period, following a loss of 17,000 previously. On the wage front, growth shows signs of moderation. Average Earnings Excluding Bonuses rose by 4.5% YoY, in line with expectations but slightly below the prior reading of 4.6%. Average Earnings Including Bonuses increase by 4.7%, marginally above forecasts but slower than the previous release. These figures reinforce expectations of upcoming monetary easing by the Bank of England (BoE).

Investors now turn their attention to the UK Consumer Price Index (CPI) data for December, due on Wednesday, to gain further insight into the interest rate outlook. Last week, Monetary Policy Committee (MPC) member Alan Taylor said inflation could return to the Bank of England’s 2% target by mid-2026, opening the door to a faster normalisation of interest rates. Against this backdrop, the contrast between improving sentiment in the Eurozone and signs of cooling momentum in the UK continues to support EUR/GBP.