ING expects the euro to strengthen against the pound in the near term, projecting it could reach 0.880 as domestic pressures weigh on sterling. The bank anticipates a 20 basis point rate cut at the BoE's March meeting, currently priced in, with a further 40% probability of a June cut. Geopolitical risk and fragile risk sentiment are seen as more impactful on the pound than the euro, though domestic dynamics remain the primary factor pressuring sterling. Political risk is another major concern for the pound. ING maintains its baseline forecast for EUR/GBP to breach 0.880, viewing the euro as less preferable than the pound in the short term.

Robust UK retail sales data for January, surging 1.8% (the largest gain since May 2024), significantly outperformed expectations. This was accompanied by a larger-than-anticipated budget surplus, leading some market participants to speculate the government might reduce bond issuance, providing a technical tailwind for gilts. Despite this strong consumer spending data, British sovereign bond yields retreated broadly, reflecting investor expectations for lower interest rates even as economic indicators suggest a strengthening recovery.

Gilt yields saw a broad decline, with the 10-year yield falling to 4.35% and the 30-year yield easing to 5.15%. The pound also weakened against the dollar, falling to 1.3464, while sterling rallied 0.6% to 10,686.60. The divergence between strong retail data and falling bond yields highlights the market's focus on the BoE's policy path and the potential impact of fiscal developments on government borrowing costs.