The EUR/GBP pair edged lower on Monday, giving up part of its earlier gains as traders remained cautious ahead of major central bank decisions later this week. At the time of writing, the cross trades near 0.8636 after failing to maintain momentum above the 0.8650 level.

Market participants are largely avoiding strong directional positions before policy announcements from the European Central Bank and the Bank of England, both scheduled for Thursday. These meetings come during a period of heightened global uncertainty as the ongoing conflict involving the United States and Iran continues to drive volatility in energy markets.

Rising oil prices remain a key concern for policymakers in both regions. Higher energy costs risk reigniting inflationary pressures across Europe and the United Kingdom, potentially complicating the policy outlook for both central banks. Elevated energy prices could also slow economic activity, creating a challenging balance between supporting growth and controlling inflation.

The ECB is widely expected to keep its benchmark rates unchanged at the upcoming meeting. Current forecasts suggest the Deposit Facility Rate will remain at 2.00%, while the Main Refinancing Operations Rate is projected to stay at 2.15% and the Marginal Lending Facility at 2.40%. Despite expectations for a pause, investors will closely monitor comments from Christine Lagarde for clues about future policy direction. Markets are increasingly betting that the ECB could begin raising rates again later this year, with some expectations pointing to a possible move by July.

However, the Eurozone’s strong dependence on imported energy creates additional risks. Persistently high oil prices could undermine economic growth across the region, potentially complicating the ECB’s policy path. Lagarde recently emphasized that the central bank remains determined to prevent the Iran conflict from triggering an inflation shock similar to the one experienced after the Russian invasion of Ukraine.

In the United Kingdom, the policy outlook has also shifted in recent weeks. The Bank of England is now expected to hold the Bank Rate steady at 3.75% at its upcoming meeting. Earlier, markets were pricing in nearly an 80% probability of a rate cut, but rising inflation risks have led investors to reconsider that outlook.

Some traders are even beginning to price in the possibility that the BoE may raise interest rates before the end of the year, despite ongoing concerns about sluggish economic growth in the UK.

Looking ahead, markets will also focus on upcoming economic data releases. Key figures include Eurozone inflation data due on Wednesday and the UK labor market report scheduled for Thursday. These indicators could provide additional insight into the inflation outlook and influence near-term movements in the EUR/GBP pair.

Trade Idea:
Sell EUR/GBP near 0.8650 with a target around 0.8580. Central bank uncertainty and cautious sentiment may keep the pair capped in the short term.