EUR/GBP rises as markets assess ECB and BoE rate decisions, inflation outlook

Finance

EUR/GBP rises as markets assess ECB and BoE rate decisions, inflation outlook

EUR/GBP edges higher on Friday, recovering losses recorded in the previous day after the European Central Bank (ECB) and Bank of England (BoE) monetary policy announcements. At the time of writing, the cross trades near 0.8647, remaining confined within a narrow range that has defined price action for more than a week.

The Euro (EUR) outperforms the British Pound (GBP) on Friday as traders anticipate the ECB could raise rates sooner than expected, even as markets price in multiple rate hikes by the BoE.

Both the ECB and the BoE kept interest rates unchanged at 2% and 3.75%, respectively, on Thursday, while highlighting rising inflation risks driven by higher Oil and energy prices amid the ongoing US-Israel war with Iran.

The ECB said it is not pre-committing to any specific rate path and will base decisions on the inflation outlook and related risks, while the BoE offered 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.”

The ECBs latest projections point to increasing uncertainty in the economic outlook. For 2026, growth is seen at 0.9% in the baseline scenario, slowing to 0.6% under the adverse scenario and 0.4% in a severe scenario.

At the same time, inflation is projected to rise to 2.6% in the baseline, accelerating to 3.5% in the adverse case and 4.4% in the severe scenario.

Meanwhile, the BoE also revised its inflation outlook higher, expecting the Consumer Price Index (CPI) to average around 3% in Q2 2026, up from 2.1% in its February projections.

Both the Eurozone and the UK are net energy importers, meaning higher Oil and energy prices can push inflation higher while weighing on economic growth, raising stagflation risks. However, the ECB appears relatively better positioned, with inflation still close to its 2% target. In contrast, UK inflation remains above the BoEs target, reducing the scope for aggressive rate hikes to counter an Oil-driven inflation shock.

Markets now fully price an ECB rate hike by July and another by year-end, with some analysts pointing to a possible move as early as April. In the UK, markets are pricing in more than two BoE rate hikes this year, with roughly a 50% chance of an April hike.

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