Euro gains as inflation and BoE policies diverge

The euro rose slightly against the pound on Friday, with EUR/GBP trading around 0.8715, up about 0.06%. The move came as stronger Eurozone inflation data supported expectations of tighter policy from the European Central Bank (ECB), while the pound lagged amid cautious signals from the Bank of England (BoE).

Euro gains on stronger inflation backdrop

Revised Eurozone data showed the Harmonized Index of Consumer Prices climbed 1.3% month-on-month in March, more than double the 0.6% gain in February and above the earlier 1.2% estimate.

On an annual basis, headline inflation accelerated to 2.6% from 1.9%, the highest reading since July 2024. Core inflation eased slightly to 2.3% from 2.4%, suggesting underlying price pressures remain elevated even as some components cool.

These figures have reinforced expectations that the ECB could shift to a firmer stance when policymakers meet on April 29–30. President Christine Lagarde said this week the bank would remain “agile”, but stopped short of signaling an immediate tightening move.

Rate expectations firm for the ECB

Market pricing points to a gradual move toward higher rates in the Eurozone later this year. Current data from trading platforms indicate roughly a 20% chance of a rate hike at the April meeting, with a quarter-point increase by June almost fully priced in and another hike by year-end widely anticipated.

Separate survey data show a broad consensus forming for at least one quarter-point rise in June, with traders expecting the recent conflict in Iran to keep upward pressure on inflation through higher energy costs.

Pound under pressure despite stronger UK growth

In the United Kingdom, the pound remained under pressure even as economic data surprised to the upside. The Office for National Statistics reported that GDP grew 0.5% in February, beating expectations for a 0.1% increase and pointing to firmer near-term momentum.

BoE governor Andrew Bailey stressed that the central bank would not rush into policy changes while global energy markets adjust to supply disruptions stemming from tensions in the Middle East. He warned that higher oil and gas prices are likely to feed into domestic inflation, but noted that elevated uncertainty clouds the rate outlook.

BoE policymaker Jonathan Greene said that market expectations for two or fewer rate hikes this year are broadly consistent with current economic conditions.

Softer medium-term outlook for the UK

Despite recent growth, the United Kingdom faces a weaker medium-term backdrop. The International Monetary Fund has cut its 2026 UK growth forecast to 0.8% from 1.3%, citing the country’s exposure to the ongoing Iran-related geopolitical conflict.

The OECD has also reduced its 2026 UK GDP forecast from 1.3% to 0.8%, underscoring concerns that higher energy costs and global uncertainty could weigh on activity.

UK inflation has held at 3.0% for the 12 months to February 2026, above target but not accelerating sharply. Futures pricing now reflects around a 56% probability of just one BoE rate increase by the June 18 meeting, a marked scaling back from earlier expectations for several hikes.

Global energy shock amplifies policy divide

The conflict in Iran and the resulting disruption to supplies has driven Brent crude to around $98 per barrel following a sharp rally in March. The de facto closure of the Strait of Hormuz has created what the International Energy Agency describes as the largest disruption in the history of the global oil market.

This shock is amplifying the policy divergence between the ECB and BoE. Updated projections show Eurozone inflation for 2026 at 2.6%, revised up from 1.9%, adding pressure on the ECB to respond more decisively.

By contrast, UK authorities appear more willing to tolerate above-target inflation for longer to avoid undermining already weak growth prospects.

Positioning and sentiment in currency markets

For traders, the widening gap in central bank responses provides a clearer directional narrative. The Eurozone policy stance is increasingly seen as more tightly linked to incoming inflation data, which tends to support the single currency.

The UK, facing softer growth and a central bank hesitant to tighten aggressively, looks more vulnerable to currency weakness.

Data from the Commodity Futures Trading Commission show non-commercial traders holding a net short position of 56,400 contracts in the pound as of April 10. The euro, by comparison, is only modestly out of favor, with a net short of 7,500 contracts, suggesting less conviction against the common currency.

Cross-asset and daily currency moves

According to the daily currency performance table, the euro’s strongest move on the day was against the New Zealand dollar, where it gained about 0.15%. Against other major currencies, changes were more limited.

The US dollar slipped 0.13% versus the euro and 0.06% against the pound. The Japanese yen edged 0.02% lower against the euro, and the Canadian dollar was broadly unchanged on the day.

The combination of firmer Eurozone inflation, a more hawkish rate trajectory in the bloc, and a cautious BoE stance leaves EUR/GBP tilted toward the euro, with traders watching upcoming central bank meetings and energy market developments for confirmation of this trend.