• EUR/GBP edges higher on Friday, recovering from prior losses as markets digest ECB and BoE policy decisions.
• ECB and BoE kept rates unchanged on Thursday and highlighted rising inflation concerns.
• Traders weigh diverging inflation outlooks and policy flexibility between the ECB and BoE.

EUR/GBP edges higher on Friday, recovering losses recorded in the previous day after the European Central Bank (ECB) and Bank of England (BoE) monetary policy announcements. At the time of writing, the cross trades near 0.8647, remaining confined within a narrow range that has defined price action for more than a week.

The Euro (EUR) outperforms the British Pound (GBP) on Friday as traders anticipate the ECB could raise rates sooner than expected, even as markets price in multiple rate hikes by the BoE.

Both the ECB and the BoE kept interest rates unchanged at 2% and 3.75%, respectively, on Thursday, while highlighting rising inflation risks driven by higher Oil and energy prices amid the ongoing US-Israel war with Iran.

The ECB said it is not pre-committing to any specific rate path and will base decisions on the inflation outlook and related risks, while the BoE offered limited forward guidance, stating it “stands ready to act as necessary to ensure that inflation remains on track to meet the 2% target in the medium term.”

The ECB’s latest projections point to increasing uncertainty in the economic outlook. For 2026, growth is seen at 0.9% in the baseline scenario, slowing to 0.6% under the adverse scenario and 0.4% in a severe scenario. At the same time, inflation is projected to rise to 2.6% in the baseline, accelerating to 3.5% in the adverse case and 4.4% in the severe scenario, highlighting the risk of weaker growth alongside stronger price pressures. Meanwhile, the BoE also revised its inflation outlook higher, expecting the Consumer Price Index (CPI) to average around 3% in Q2 2026, up from 2.1% in its February projections.

Both the Eurozone and the UK are net energy importers, meaning higher Oil and energy prices can push inflation higher while weighing on economic growth, raising stagflation risks. However, the ECB appears relatively better positioned, with inflation still close to its 2% target. In contrast, UK inflation remains above the BoE’s target, reducing the scope for aggressive rate hikes to counter an Oil-driven inflation shock.

Markets now fully price an ECB rate hike by July and another by year-end, with some analysts pointing to a possible move as early as April. In the UK, markets are pricing in more than two BoE rate hikes this year, with roughly a 50% chance of an April hike.