EUR/GBP extended its fall on Wednesday and reached session lows near 0.8700. The Pound held firmer than the Euro as broader market mood improved.
A two-week ceasefire deal between the US and Iran, including the reopening of the Strait of Hormuz, lifted risk appetite. The move drove rallies in both the Euro and the Pound against the safe-haven US Dollar.
Ceasefire Deadline And Market Reaction
The agreement came less than two hours before US President Donald Trump’s Tuesday 8:00 PM Easter time deadline (00:00 GMT Wednesday). It followed his warning that “a whole civilisation would die” if Iran did not accept his demands.
UK and Euro Area data did not support their currencies. UK house prices fell in March, while German Factory Orders growth missed forecasts, producer prices fell further, and retail sales declined.
The Eurozone figures were for February, before the Iran war began, and saw limited market reaction. Attention stayed on the ceasefire and wider risk conditions.
ECB officials Dimitar Radev and Pierre Wunsch repeated concerns about rising inflation risks. Wunsch said a rate rise could come as early as April, contrasting with the Bank of England’s “wait and see” approach.
Correction And Subsequent Market Context
The item was corrected on April 8 at 11:25 GMT to amend a line about a third straight day of depreciation.
Looking back to this time in 2025, we recall the market reacting to a temporary ceasefire and testing the 0.8700 support level. The focus then was on short-term risk sentiment, where the pound briefly outperformed. A year later, that geopolitical news is a distant memory, and the trading landscape has completely changed.
The primary driver for the pair has since shifted to the starkly different paths taken by the ECB and the Bank of England. While ECB officials were talking tough in April 2025, their subsequent actions have been more cautious as Eurozone growth stalled. We are now seeing the Bank of England maintain a more aggressive stance to fight stubbornly high domestic price pressures.
This policy divergence is reflected in current statistics, with the UK’s latest core inflation reading at 3.5%, significantly above the Eurozone’s 2.8%. This has pushed the EUR/GBP exchange rate down towards the 0.8550 area, well below the support we saw last year. Consequently, the interest rate differential between UK and German government bonds has widened in favour of the pound.
For derivative traders, this suggests that implied volatility may rise ahead of key inflation data releases from both economies. Options strategies that benefit from a continued downward trend, such as buying puts, could be considered. However, traders should be wary of any signs that the Bank of England may pivot, which would cause a sharp upward correction.
In the coming weeks, we must watch the upcoming central bank commentary and purchasing managers’ index (PMI) data very closely. Any data suggesting the UK economy is slowing more than expected could challenge the current narrative and unwind the pound’s recent strength. This makes short-dated options attractive for capturing potential swings around these specific event risks.
