EUR/GBP traded around 0.8680 on Friday, declining by 0.10% as investors reacted to diverging economic outlooks in the Eurozone and the United Kingdom (UK) [1]. In the Eurozone, fourth-quarter Gross Domestic Product (GDP) growth was confirmed at 0.2% quarter-on-quarter, below the earlier estimate of 0.3% and lower than the 0.3% growth recorded in the third quarter. Annual growth was revised down to 1.2%. For the full year 2025, Eurozone economic growth accelerated to 1.4%, up from 0.9% in 2024 [1]. Despite easing inflation and lower interest rates, the Eurozone faces headwinds such as trade tensions linked to US tariffs on European imports [1].
The European Central Bank (ECB) meeting accounts revealed policymakers discussed the inflation outlook, noting that inflation could potentially fall further below the 2% target. However, these discussions occurred before the escalation of geopolitical tensions between the US and Iran, which could impact the global economic outlook, especially for energy-dependent Europe [1].
In the UK, rising energy prices due to the Middle East conflict are increasing inflationary risks, reducing the likelihood of a near-term Bank of England (BoE) rate cut. Analysts at Capital Economics believe a rate cut at the March 19 meeting is unlikely unless regional tensions ease quickly [1]. The Office for Budget Responsibility (OBR) lowered its UK growth forecast for 2026 to 1.1%, down from 1.4% projected in November, warning that the Middle East war could significantly affect both global and UK economies [1].
Market expectations for BoE policy have shifted sharply, with investors now pricing only a 20% chance of a rate cut in March, compared to 75% a week ago. Only a single 25-basis-point reduction is expected over the course of the year. Rabobank’s Senior FX Strategist Jane Foley noted that prior to the Middle East crisis, a March 19 BoE rate cut was widely expected, but now only one more 25 bp cut is anticipated in the next six months [1].
CONCLUSION
The EUR/GBP dipped as Eurozone growth slowed and UK rate cut odds dropped, reflecting increased uncertainty from geopolitical tensions and revised economic forecasts. Market sentiment has turned more cautious, with investors sharply reducing expectations for near-term BoE easing. The outlook remains clouded by risks from the Middle East conflict and its potential impact on inflation and growth.