The EUR/GBP pair saw modest gains during Friday's European trading session, hovering around the 0.8660 level. Market focus remains centered on expectations for European Central Bank (ECB) interest rate hikes, risks of a UK economic slowdown, and developments in the Middle East, with the euro generally outperforming the pound.
Recent expectations for a ceasefire agreement between the US and Iran have improved global market risk sentiment. However, as the agreement has not yet been formally finalized, market volatility remains elevated. The US and Iran have reached a preliminary framework for a 60-day Memorandum of Understanding (MoU), though it still awaits final approval from US President Trump.
While the Middle East situation has eased somewhat compared to before, markets remain concerned about potential recurring risks to energy supplies. The stability of the Strait of Hormuz, a critical global energy transit chokepoint, continues to directly impact the economic and inflation outlook for Europe. For the euro, the primary support currently stems from the ECB's persistently hawkish policy expectations. Market pricing indicates investors now assign a 91% probability to a 25-basis-point rate hike by the ECB at its June 11 meeting, which would lift the ECB's deposit rate to 2.25%.
Concurrently, markets also estimate a roughly 50% chance of another ECB rate hike within the year. This expectation has notably enhanced the appeal of euro-denominated assets. ECB Executive Board member Isabel Schnabel recently stated that even if the Middle East situation eases rapidly, the ECB should continue raising rates because previous energy price increases have already begun to spread through the broader economy.
The ECB's primary concern has shifted from energy prices themselves to "second-round inflation effects." This means rising energy costs are gradually pushing up service sector prices, wages, and corporate operating expenses, thereby increasing the stickiness of inflation in the eurozone.
Analysts believe the ECB's current policy stance is significantly more hawkish than previously anticipated by the market. With eurozone core inflation remaining elevated and the risk of energy prices staying high in the long term not fully eliminated, the ECB is unlikely to pivot to a looser policy stance quickly.
In contrast, the British pound faces more pressure recently. The latest UK economic data indicates a broad slowdown in economic activity, a cooling labor market, and signs of weakening consumer demand. Markets are concerned that a renewed increase in international energy prices would further squeeze UK household spending power. The UK is one of the economies more reliant on energy imports, making it particularly sensitive to changes in international oil and gas prices. The market views that energy cost pressures stemming from the Middle East situation could further weaken the UK's economic growth prospects.
Simultaneously, investor expectations for the Bank of England's (BoE) future rate-hiking capacity have also begun to diminish. Analysis points out that markets have already reduced bets on the number of BoE rate hikes expected in 2026, while UK government bond yields have recently seen a notable pullback. UK gilt yields have registered one of their largest weekly declines since the end of 2023, reflecting growing market caution regarding the UK economic outlook and future monetary policy trajectory.
Furthermore, improved expectations for political stability in the UK have reduced some market risk premiums. The market anticipates that UK fiscal policy is likely to remain relatively stable going forward, which, while supportive for the bond market, also implies limited scope for fiscal stimulus. Future market attention will also focus on speeches by BoE Governor Andrew Bailey and policy committee members Catherine Mann and Jonathan Haskel. If the BoE maintains its hawkish stance, it could help stabilize the pound temporarily; however, if officials further emphasize economic slowdown risks, sterling could face continued pressure.
Meanwhile, Germany's upcoming preliminary inflation data is also a focal point for markets. As the eurozone's largest economy, German inflation figures will directly influence market judgments on the ECB's future policy path. If German inflation continues to exceed market expectations, it could further strengthen ECB rate hike expectations, potentially driving the EUR/GBP pair higher.
From a daily chart perspective, the EUR/GBP pair maintains an overall structure biased towards strength within a range. The exchange rate has recently continued to trade above its 20-day and 50-day moving averages, indicating the medium-term trend remains bullish. The 0.8640 area has become a key support level. The pair has found buying support upon testing this area multiple times recently, suggesting medium-term bullish sentiment still holds an advantage. If subsequent German inflation data proves robust while UK economic data remains weak, EUR/GBP could potentially break above the 0.8700 level.
However, the pair has faced resistance multiple times in the 0.8665 to 0.8680 zone recently, indicating selling pressure persists above. If it fails to break through this resistance effectively, a short-term pullback to test the 0.8640 support is possible. Overall, the core logic driving the current EUR/GBP movement remains the policy divergence trade between the "ECB's hawkishness" and "UK economic slowdown." Future German inflation data, BoE commentary, and international energy price movements will likely be key factors determining the pair's next directional phase.