The Euro is losing value against the British Pound. Currently, the EUR/GBP exchange rate is about 0.8655, which is a drop of nearly 0.43% during American trading hours. This comes as attention shifts to the European Central Bank’s upcoming policy decision, where the deposit rate is expected to stay at 2.00%. Recent data indicates a small improvement in Euro Area Consumer Confidence. The index has risen from -15.3 in June to -14.7 in July, exceeding expectations. Although challenges remain, this improvement suggests better household outlooks. Additionally, there is a rising demand for mortgages and business loans, as noted in the Bank Lending Survey.

Current Inflation Expectations

Inflation expectations among households in the Eurozone have returned to levels seen before the pandemic. This allows the ECB to keep its current stance. The easing period appears to be ending as the bank takes a wait-and-see approach. In the UK, Governor Andrew Bailey emphasized the importance of existing regulatory frameworks, pushing back against recent calls for looser banking rules. He noted that increases in borrowing costs align with global trends and confirmed a pause on the development of a digital Pound, given advancements in the private sector. We are eagerly anticipating upcoming economic data, particularly the ECB’s monetary policy decision and PMI figures. Although no changes to rates are expected, President Lagarde’s comments may provide clues about future strategies, especially with regard to Eurozone and UK PMI performance, which could affect currency stability. The Euro’s weakness against the Pound seems to be a continuing trend, with the pair recently dropping below the critical 0.8500 level for the first time in months. This shift is due to differing monetary policy expectations between the two central banks. Traders in derivatives should prepare for further declines in this currency pair.

Monetary Policy Divergence

The European Central Bank is widely anticipated to reduce its deposit rate from 4.00% in its upcoming June meeting, with markets estimating over a 90% chance of this happening. Recent Eurozone inflation data for May was slightly above expectations at 2.6%, but it is not expected to prevent a rate cut. A proactive rate reduction will likely put further pressure on the Euro in the coming weeks. On the other hand, the Bank of England is being more cautious. UK inflation has dropped to 2.3%, which is much closer to its target. Bailey has pointed out persistent inflation in services, shifting market expectations for the first UK rate cut to August or later. This difference in policy should continue to strengthen the Pound. Considering this outlook, we suggest traders buy put options on the EUR/GBP pair to profit from a potential decline. These options offer a defined-risk method to take a bearish stance, and current volatility levels make the entry price quite appealing. The key events to monitor will be the official statements following the central bank meetings. Historically, the 0.8400 level has been a strong support area for this currency pair. Recent PMI data shows that services are boosting growth in both regions. However, any sign of weakness in the Eurozone’s manufacturing sector could potentially break this significant support level. We will keep an eye on upcoming data releases for any such indications. Create your live VT Markets account and start trading now.

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