Europe Seeks a Balance Point

EUR/GBP

Key zone: 0.8750 - 0.8800

Buy: 0.8800 (on strong positive fundamentals) ; target 0.8900-0.8950; StopLoss 0.8760

Sell: 0.8740 (after retesting the 0.8780 level) ; target 0.8600; StopLoss 0.8780

Key European central banks are approaching interest-rate decisions that will set the direction for the EUR and GBP at least through Q1 2026 — assuming no external shock distorts the U.S. dollar’s fundamental backdrop.

Current macro data from the euro area and the UK generally support the case for monetary-policy adjustments; however, markets have already priced in most of these expectations. Participants are avoiding large directional positions, preferring instead to trade stop-hunting on both sides of established ranges.

Recall: beyond geopolitical factors, the dollar remains under pressure from expectations of two additional Fed rate cuts. European currencies, despite their own structural challenges, must factor in this external risk and adapt accordingly.

S&P Global data showed that in December, eurozone private-sector activity grew more slowly than forecast, amid an unexpected deterioration in German manufacturing. The eurozone composite PMI fell to 51.9 from 52.8 in November, remaining above the 50 threshold that separates expansion from contraction.

The decline points to a slowdown in the pace of economic expansion, even though growth technically persists.

Despite this, the ECB is unlikely to rush into an immediate rate change. The PMI weakness may reflect a combination of factors — from U.S. tariffs to core inflation and geopolitical uncertainty — and is still viewed by the regulator as a short-term phenomenon.

• ECB

Under Lagarde’s leadership, the ECB has gradually shifted toward a firmer expectations framework, reflected in inflation projections and officials’ commentary. However, a meaningful rate adjustment still lacks a clear trigger: there has been no sharp deterioration in retail demand, the labor market, or a decisive drop in inflation below target.

The base case is a rate hold at 2.00% and a restrained accompanying statement without overt optimism. Inflation remains close to target, and growth is weak but not critical.

The key risk for the euro is not the pause itself, but the tone of the press conference and the trajectory of forecasts (inflation, wage dynamics, and the degree of policy restrictiveness). If markets reassess the pace of easing, a pronounced EUR/USD short squeeze is possible.

Bank of England

Labor-market weakness combined with wage pressures supports the case for a rate cut, yet inflation control remains the priority. What matters is not only the decision itself but also the vote split, wording around labor and services, and Bailey’s rhetoric.

Markets assign roughly an 85% probability to a 25 bp cut — from 4.00% to 3.75% — with a narrow vote split (roughly 5–4).

The main risk for the pound would be a rate hold or a more hawkish signal if inflation and services prove resilient. In that scenario, a sharp GBP/USD short squeeze is likely.

The most resilient instrument in the current setup appears to be EUR/GBP: dollar noise is absent here, and divergence between the ECB and the BoE takes center stage.

The logic is as follows:

• a neutral ECB with a dovish BoE – upward bias in EUR/GBP;
• a dovish ECB with a firmer BoE – downside risk for EUR/GBP.

Given the base case — ECB holding rates and the BoE cutting — the most probable move remains higher in EUR/GBP, where the euro appears structurally stronger than the pound.

Tactics: wait for both decisions and trade the second wave of the reaction 15–30 minutes after the Bank of England announcement.

So we act wisely and avoid unnecessary risks.

Profits to y’all!