The euro traded positively against the pound in early European trading on Thursday, hovering around 0.8715. The pound was pressured primarily by rising domestic political risks in the UK, with by-elections scheduled for the Gorton and Denton constituencies in Manchester to fill vacant parliamentary seats.

This election is seen as a crucial test of Prime Minister Keir Starmer's approval ratings. Markets are concerned that a significant defeat for the ruling Labour Party could trigger anxieties about political stability in the UK and negatively impact the pound.

At the same time, there are potential pressures on the Eurozone's fundamentals. Data shows that the Eurozone's inflation rate fell to 1.7% in January, a 16-month low. This data reinforces market expectations that the European Central Bank may maintain a dovish policy path.

European Central Bank President Christine Lagarde's follow-up remarks will be the focus of the market. However, the euro's upside potential may be affected by German inflation data. The market is awaiting the release of Germany's preliminary CPI figures to gauge the pace of future monetary policy easing. A further slowdown in inflation could increase selling pressure on the euro.

From a technical perspective, the EUR/GBP pair remains within a range-bound, slightly bullish structure. The price is trading above the short-term moving averages, indicating a slight advantage for the bulls. The RSI indicator is in the 50-60 range, suggesting moderately bullish momentum but no clear trend breakout.

The first support level to watch is around 0.8680, which is the lower edge of the recent consolidation range; a break below this level could lead to a further test of the 0.8640 area. Resistance is located in the 0.8750-0.8780 area; a decisive break above this level could potentially lead to a challenge of higher levels around 0.8830.

Editor's Note:

The current EUR/GBP exchange rate is primarily influenced by the interplay between UK political risks and Eurozone inflation expectations. The pound is weighed down by political uncertainty, while the euro's gains are limited by expectations of central bank easing. In the short term, the exchange rate is more likely to maintain a range-bound trading pattern.

If political risks continue to escalate or German inflation falls short of expectations, the EUR/GBP exchange rate may strengthen further; conversely, if the European Central Bank releases a more dovish signal, the exchange rate may fall back and consolidate.