EUR/GBP at 0.8621: The Cross That Refuses to Pick a Side

A confession before the numbers. In March I argued the EUR/GBP cross would drift toward 0.88 by midsummer on the assumption that the Bank of England's internal majority would tilt toward earlier easing than its Frankfurt counterpart. Two months on, the cross trades 0.8621, down 0.28% on the session, and the assumption looks premature. The vote splits in London have been narrower than I priced; the wage data has not yet given the doves their cover. I was early, possibly wrong. The next print of UK services inflation will tell me which.

Overnight, the relevant move was not in spot but in the relative behaviour of the two majors. GBP/USD added 0.34% to 1.3502 while EUR/USD barely moved at 1.1640, up a rounding error. That is the entire story of the session: sterling did the work, the euro sat. On a London bank holiday, with thin liquidity, one should not over-interpret a 45-pip move in cable. But the direction matches what the two-year spread has been whispering for three weeks — that the market is pricing the Bank's next move further out than the ECB's, and the gilt curve is the one carrying the conviction.

Equities are not arguing. The DAX closed Friday's extension at 25,393.93, up 0.84%, and the FTSE 100 print from the 22nd at 23,167.47 was firmer by 0.95%. Both indices are doing what indices do when rate-cut expectations are stable and earnings revisions have stopped falling: they grind. The German tape in particular has been quietly absorbing the fiscal expansion that the coalition committed to at the start of the year, and the Bund curve has steepened in response — not dramatically, but enough that the term premium is no longer the negative number it was in 2024. Steepening is a story about supply, and supply is a story about the finance ministry, not the central bank.

What I am watching this week. First, the flash HICP prints for the euro area on Friday; a services component above 3.9% would push my ECB terminal estimate up by 15 basis points and weaken my EUR/GBP call further. Second, the UK retail sales revision, which has a habit of changing the Bank's internal arithmetic more than the headline CPI does. Third, any signal from the Doha track on Iranian frozen assets — not because diplomatic rhetoric moves curves, but because a Hormuz outcome moves Brent, and Brent moves the euro area's headline inflation path with a six-week lag.

My bias remains for a higher EUR/GBP by August, but I now want to see the next two UK wage prints before I defend it in size. Forecasting without a stop-loss is theatre.