EUR/GBP is trading well at around 0.8675, up by 0.14% in the early European session on Tuesday. The Euro is gaining ground against the Pound as expectations rise that the ECB will keep interest rates steady during its July meeting. After several rate cuts brought the deposit rate down to 2%, ECB President Christine Lagarde hinted that the easing cycle might be nearing its end. Meanwhile, trade tensions between the US and EU are escalating, as the US proposes higher tariffs. In response, the EU is preparing to take action.

UK Political and Fiscal Risks

The GBP could weaken due to ongoing political issues and fiscal uncertainties in the UK, along with a cooling labor market. Current market speculation shows an 89% chance that the Bank of England will lower borrowing costs in August. The Euro is used by 19 EU countries and ranks second in global trade, with a daily turnover of over $2.2 trillion. The European Central Bank (ECB), based in Frankfurt, manages monetary policy for the Eurozone, affecting the Euro through interest rates and stability measures. The Euro’s value is influenced by inflation data from the Eurozone. Key economic indicators like GDP, Manufacturing PMIs, and trade balances also play a role. A positive trade balance could bolster the currency due to increased demand for exports. We are witnessing a clear division between the policies of the two major central banks, which is likely to benefit the Euro in the coming weeks. While the European Central Bank is expected to be cautious, the likelihood of a Bank of England rate cut is high. This policy gap suggests that the EUR/GBP exchange rate could rise.

Inflation Data and Its Impact

The outlook for a stronger Euro is supported by recent inflation data, showing consumer prices in the Eurozone rose to 2.6% in May. This has made officials reluctant to commit to further rate cuts. Such persistent inflation reinforces a cautious stance from figures like Ms. Lagarde, providing a strong foundation for the Euro against the Pound. On the other hand, the Pound struggles with political risks and economic indicators. The upcoming UK general election on July 4th adds to fiscal uncertainty, while inflation reaching the 2.0% target in May gives policymakers confidence to lower borrowing costs. This reinforces market expectations for a rate cut, which is usually negative for a currency. Given this outlook, traders may want to consider buying EUR/GBP call options to benefit from a potential increase. This strategy allows for profit if the exchange rate moves closer to or above 0.8700 while minimizing downside risk to the premium paid. Increased volatility is likely around the UK election, making options an appealing choice. Historically, times of UK political instability paired with a more stable Eurozone economic policy have resulted in sustained strength for this currency pair. Ongoing trade disputes, despite being a global risk, may lead to capital flowing into the Eurozone as a key trading region, further supporting our market outlook. Create your live VT Markets account and start trading now.

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