EUR/GBP edges up as firmer Eurozone inflation contrasts with cautious BoE

• EUR/GBP edges higher around 0.8715, posting modest gains on Friday.
• Rising Eurozone inflation supports expectations of future monetary tightening in the Eurozone.
• The Pound Sterling remains fragile despite stronger UK GDP data as the BoE signals patience on rates.

EUR/GBP trades around 0.8715 on Friday at the time of writing, up 0.06% on the day, as the Euro (EUR) finds moderate support from stronger inflation data in the Eurozone while the Pound Sterling (GBP) remains constrained by cautious signals from the Bank of England (BoE).

On the European side, the latest inflation figures are reinforcing the fundamental backdrop for the single currency. Revised data released on Thursday showed that the Eurozone Harmonized Index of Consumer Prices (HICP) rose by 1.3% MoM in March, accelerating sharply from 0.6% in February and slightly exceeding the preliminary estimate of 1.2%. On a yearly basis, inflation was revised higher to 2.6%, up from 1.9% previously and marking its highest level since July 2024. Core inflation, which excludes energy, food, alcohol and tobacco, eased marginally to 2.3% YoY from 2.4% in the previous month.

This environment could encourage the European Central Bank (ECB) to adopt a more hawkish tone at its upcoming monetary policy meeting scheduled for April 29-30. For the moment, however, policymakers are maintaining a cautious stance. ECB President Christine Lagarde recently said the institution must remain “completely agile” regarding interest rates, while stressing that there is no bias toward tightening.

Despite this measured rhetoric, financial markets continue to anticipate a gradual tightening cycle. According to Reuters, traders currently see only about a one-in-five probability of a rate hike in April, but a first 25-basis-point increase by June is now almost fully priced in, with a second move later in the year also expected.

Meanwhile, the Pound Sterling remains under pressure even after stronger-than-expected growth data from the United Kingdom (UK). The Office for National Statistics (ONS) reported that UK Gross Domestic Product (GDP) expanded by 0.5% MoM in February, significantly beating the consensus forecast of 0.1%. While this initially suggested improving economic momentum, several analysts caution that the figures may reflect conditions before the escalation of geopolitical tensions linked to the Iran conflict.

BoE Governor Andrew Bailey reinforced this cautious outlook, stating that policymakers are “not going to rush to judgments” on interest rate increases as the global economy absorbs a major energy shock triggered by the Middle East war. He emphasized that while higher Oil and Gas prices will feed into inflation, other uncertainties make the policy outlook particularly complex.

BoE policymaker Megan Greene also suggested that markets were justified in scaling back expectations for aggressive tightening, noting that the current pricing of two or fewer rate increases this year appears broadly appropriate.

Adding to concerns, the International Monetary Fund (IMF) recently downgraded the United Kingdom’s growth outlook for 2026 to 0.8%, down from a previous forecast of 1.3%, highlighting the vulnerability to the economic fallout from the Iran war. This weaker macroeconomic outlook continues to limit the Pound Sterling’s ability to strengthen against the Euro in the near term.