EUR/GBP Stays Supported as ECB Tightening Bets Outrun BoE

Quick Take

EUR/GBP still looks tilted toward the euro. The move is not being driven by a suddenly strong euro-area growth story. It is being driven more by relative policy expectations, with the market increasingly pricing the ECB as the more credible tightening risk while the BoE looks less free to respond aggressively because the UK growth backdrop is shakier.

What Changed

The latest energy shock pushed that policy gap back into focus. Reuters reported on 13 April that sterling was flat against the euro even as it fell against the dollar, with FX strategists warning that high energy prices would likely remain negative for both currencies. The difference is that markets have become more willing to price extra ECB tightening than extra BoE tightening.

That relative shift matters more for EUR/GBP than the headline direction of oil alone. If both Europe and the UK are hurt by higher energy costs, the cross will usually move toward whichever central bank is seen as more likely to defend against second-round inflation effects. Right now, that bias has been leaning more toward the ECB than the BoE. This is an analytical inference based on the latest Reuters coverage.

Why the Euro Has Been Firmer

On the euro side, rate expectations have turned more hawkish again. Reuters reported that traders now see a 44% chance of an ECB hike in April and a 70% chance of a third hike by December, lifting expectations for the deposit rate to around 2.68% by year-end. ECB Vice President Luis de Guindos also said future hikes would depend on whether the oil shock starts feeding more broadly into prices.

That fits with the ECB’s March stance. The central bank kept rates unchanged on 19 March, but it also said the war in the Middle East had created upside risks to inflation and downside risks to growth, and that higher energy prices would materially affect near-term inflation. In other words, the ECB is not hiking yet, but it has left the door open in a way the market is taking seriously.

Why Sterling Looks Less Convincing

Sterling’s problem is not simply that the BoE is less hawkish on paper. It is that the UK story looks less comfortable when energy prices rise. The BoE kept Bank Rate at 3.75% in March and said inflation could rise as high as 3.5% over the next two quarters, but it also stressed the growth risks created by the conflict and worsening energy costs.

Reuters added on 13 April that market concerns over fresh BoE hikes may be overdone, with Governor Andrew Bailey and other officials pushing back against aggressive repricing. That leaves sterling in a weaker relative position: inflation pressure is rising, but the market is less convinced the BoE will be able to answer it as forcefully as the ECB.

The Growth Contrast Is Also Helping EUR/GBP

Neither side has an attractive growth story right now, but the UK side looks more vulnerable in FX terms. Reuters reported on 7 April that sterling remained near early-March levels against the euro, with analysts expecting the euro to gain over coming months because of concerns around UK business costs, public finances, and the Bank of England’s room to move.

By contrast, euro-area growth is weak, but the market currently seems more focused on ECB credibility than on euro-area activity softness. Reuters reported on 7 April that euro zone growth had slowed to a nine-month low, yet surging costs were also pushing price pressures higher. That is not a positive macro story, but for EUR/GBP it can still support the euro if it keeps the ECB on a tighter path than the BoE.

Near-Term View

My near-term view is that EUR/GBP still has a mild upside bias. The cross does not need a booming eurozone economy to stay supported. It only needs the market to keep believing that the ECB is more likely than the BoE to react firmly if energy inflation broadens. As long as that relative policy gap stays in place, dips in EUR/GBP may remain limited. This is an analytical judgment based on the current ECB-BoE pricing split.

Conclusion

The main point is simple: EUR/GBP is being held up by relative central-bank credibility, not by euro-area strength. The euro does not look especially healthy, but sterling currently looks less protected when energy prices rise and growth confidence weakens. That is why the cross still looks more supported than soft.