Executive Summary
EUR/GBP trades at 0.8725, sitting in the upper quartile of its 52-week range (0.8242–0.8865) after a volatile 18 months that saw the pair rally from the February 2025 lows near 0.8242 to the November 2025 high of 0.8865 before pulling back sharply through Q1 2026. Over the past month the pair is up 0.80%, up 0.44% over three months, but down 1.13% over six months — a choppy, range-bound profile that masks significant intra-period swings driven by the Iran-US conflict, the ECB's hawkish pivot, and gilt market stress. The dominant bilateral narrative is a stagflation contest: both economies face the same energy shock from the Iran war, but the UK is losing the comparison because its inflation is higher (3.0% vs 1.9%), its growth is weaker (0.1% QoQ vs 0.2%), its current account is structurally worse (-2.4% vs +1.6% of GDP), and its fiscal headroom is evaporating (gilt 10Y at 5.00% vs Bund at 3.05%). The ECB's hawkish pivot and German fiscal expansion provide EUR with structural supports that GBP lacks, while the BoE is trapped between rising inflation and stalling growth. Our tactical stance is Mildly Bullish EUR/GBP (conviction 2/5, confidence 58%) on the inflation/growth differential and fiscal divergence, tempered by GBP's carry advantage (+175bp) and stretched asset manager positioning that creates short-covering risk in GBP.