EUR/GBP. Analysis and Forecast

[Ben Graham]

On Monday, the EUR/GBP pair is trading within its previous range, reflecting a relative balance between the euro and the pound sterling under current market conditions.

Recent inflation data from the euro area continue to point to a steady disinflationary trend. The Harmonised Index of Consumer Prices (HICP) for December was revised down to 1.9% year-on-year from the preliminary estimate of 2.0%, falling from 2.1% in November and coming in below the consensus forecast. Core HICP was confirmed at 2.3% year-on-year, down from 2.4% a month earlier, indicating further easing of price pressures. Against this backdrop, the European Central Bank is maintaining a cautious stance and continues to follow a data-dependent, meeting-by-meeting approach, avoiding advance commitments on the future path of interest rates. This supports the euro at current levels.

On the geopolitical front, rising trade tensions between the European Union and the United States are adding an element of uncertainty for market participants. European officials have signaled readiness to take retaliatory measures should the tariff actions announced by US President Donald Trump be implemented. At the same time, EU ambassadors have agreed to step up diplomatic pressure on Washington while preparing potential countermeasures.

In contrast, UK Prime Minister Keir Starmer stated that tariffs are a misguided policy and should not be applied in relations with allies, emphasizing the United Kingdom's commitment to partnership and open dialogue.

For better trading opportunities in the EUR/GBP pair, attention should be paid to the release of UK labor market data for the three months to November, due on Tuesday. Market consensus expects the ILO unemployment rate to decline from 5.1% to 5.0%, while average earnings growth is forecast to slow to 4.6% from 4.7%. The December Consumer Price Index (CPI) and retail sales data, as well as preliminary S&P Global PMI readings for January, will also be closely watched for fresh signals on the outlook for Bank of England monetary policy.

Under these conditions, movements in EUR/GBP are likely to continue to be driven by a balance of factors: steady disinflation in the euro area provides support for the euro, while the United Kingdom faces ongoing macroeconomic and monetary uncertainty.

From a technical perspective, the pair continues to trade within a descending channel and remains in consolidation. Oscillators are negative, supporting the bears. However, if prices manage to break above the psychological 0.8700 level with strong momentum and exit the descending channel, bulls may get their chance.

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