Europe chooses a direction

EUR/GBP

Key zone: 0.8600 - 0.8650

Buy: 0.8670 (on strong positive fundamentals) ; target 0.8850; StopLoss 0.8610

Sell: 0.8600 (on a pullback after retesting the 0.8650 level) ; target 0.8450; StopLoss 0.8660

Activity ahead of the upcoming European central bank meetings is weak — both the euro and the pound are simply following the trajectory of the DXY. Speculators hope the situation may change as early as tomorrow.

The main driver of current dynamics remains the British pound.

Labor market data:

• The UK unemployment rate remained at 5.1% — the highest level since early 2021.
• Employment fell by 43 thousand (the largest drop since the end of 2020), while unemployment benefit claims increased by 17.9 thousand after a sharp decline in the previous month.
• The core wage indicator is slowing — both overall (down to 4.7%) and excluding bonuses (down to 4.5%).

The report is quite weak: the labor market clearly does not support a rate hike.

Both the market and analysts are confident that the BoE will keep all monetary policy parameters unchanged, including the interest rate, which currently stands at 3.75%. The main argument is that inflation is still above target, and it is necessary to make sure that wage pressure in the services sector is actually easing. In particular, headline CPI for the month moved out of negative territory (-0.2%) and rose to 0.4%.

Traders’ attention will be focused on the details of the meeting, especially the voting results on the rate. Recall that at the December meeting, the fate of the interest rate was decided by just one vote.

The voting forecast is “0-2-7”, meaning two Committee members will support a rate cut, while seven will vote to keep it unchanged.

This is the base and most expected scenario, which is fully priced in.

If the “average” number falls to one, the pound will receive support. But if more than two Committee members vote for a rate cut, sterling will come under pressure again.

The situation allows the Bank of England to maintain a wait-and-see stance and focus on inflation risks.

On the EUR:

The market is confident that the 2.15% rate will remain unchanged. Eurozone indicators are not yet deteriorating, but according to Lagarde, the economy feels “uncomfortable”. The latest background supporting this expectation:

• Eurozone inflation in January is around 1.7% y/y, below the 2% target (core ~2.2%, services ~3.2%) — expectations were more optimistic.
• Eurozone growth in Q4 2025 is around 0.3% q/q (better than expected) — an argument for keeping rates unchanged.

If the euro continues to strengthen significantly and starts pulling inflation down, this may become a trigger for a more accommodative policy. GDP growth of +0.3% q/q in Q4 2025 (flash estimate) is not bad, but with inflation below 2%, the ECB gains room to soften its rhetoric.

What to monitor in tomorrow’s news:

• ECB: if they stop emphasizing the decline in inflation and shift focus to problems in the services sector, this will support the EUR.
• BoE: comments on the “inflation/employment” balance — if concerns about the labor market emerge, this will bring short-term support for GBP.

The base scenario (most likely) is that both central banks keep rates unchanged, in which case the EUR/GBP trend is moderately downward.

So we act wisely and avoid unnecessary risks.

Profits to y’all!