The Euro is stable against the British Pound, sitting at 0.8670. Traders are keeping an eye on upcoming decisions from the European Central Bank (ECB) and the Bank of England (BoE), particularly due to rising uncertainties in the UK’s fiscal policies. The ECB is likely to hold rates steady, with a 62% chance of no change and a 38% chance of a cut. On the other hand, despite increasing inflation, the BoE is expected to lower rates by 25 basis points in August.

Trade Tensions Strategy

The European Union is preparing a strategy to respond to any increasing trade conflicts with the US. Recent economic indicators from the UK present mixed signals, and changes in parliament have raised questions about its fiscal plans. Technical analysis shows that EUR/GBP is consolidating, with important resistance at 0.8738. If this level is broken, we could see further upward movement. However, if it drops below 0.8650, we may see a decline down to 0.8617. The Euro is used by 19 countries in the Eurozone and is the second most traded currency in the world, accounting for 31% of foreign exchange trades. The ECB, based in Frankfurt, oversees monetary policy in the Eurozone mainly by adjusting interest rates to maintain price stability. The Euro’s value is affected by inflation, economic performance, and trade balance. Positive economic news or a strong trade balance usually strengthens the Euro, while negative data can weaken it.

Central Bank Divergence

Given the differences between the central banks, we recommend that derivative traders prepare for a possible rise in the Euro against the Pound. The ECB appears reluctant to lower rates, while the BoE seems more inclined to ease. This difference supports a stronger Euro in the medium term. To back this view, recent data shows Eurozone inflation unexpectedly increased to 2.6% in May. This makes it harder for the ECB to justify a rate cut, reinforcing a 62% chance that rates will remain unchanged. Persistent inflation should create a solid floor for the Euro. In contrast, the UK’s inflation reached the 2.0% target in May for the first time in almost three years, reinforcing the argument for a rate cut in August. Additionally, the upcoming general election on July 4th adds to the uncertainty around the UK’s fiscal situation. Together, these factors are putting pressure on the Pound. We recommend traders consider buying call options with strike prices near the 0.8738 resistance level. This strategy takes advantage of potential upward momentum if the pair breaks out of its consolidation. The cost of the option is the maximum risk involved. To manage risk, we could buy put options with a strike price below the significant support level of 0.8650. Historically, this currency pair has experienced large swings, such as the significant rally after the 2016 Brexit vote, highlighting its volatility. A drop below this support could result in a quick decline. Lastly, it’s important to watch for any rising trade tensions between the European Union and the United States. If Brussels implements retaliatory tariffs, it could harm the Eurozone’s trade balance, posing a challenge to our optimistic outlook for the Euro. Create your live VT Markets account and start trading now.

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