EUR/GBP advances to near 0.8400 as German debt reforms weigh on ECB dovish bets

• EUR/GBP rises sharply to near 0.8400 as the Euro outperforms amid Germany’s debt restructuring plan.
• The ECB reduced its interest rates by 25 bps on Thursday, as expected.
• BoE Mann sees the need for a swift policy-easing cycle due to global market uncertainty.

The EUR/GBP pair climbs to near the key level of 0.8400 in Friday’s North American session. The asset strengthens as the Euro (EUR) outperforms its peers, with traders paring European Central Bank (ECB) dovish bets on expectations that German debt restructuring would accelerate inflationary pressures. Such a scenario would force the ECB to pause the monetary policy-easing cycle in the April meeting.

This week, German leaders, including likely new Chancellor Frederich Merz, have agreed to create a 500 billion Euro infrastructure fund and debt reforms.

While ECB President Christine Lagarde believes that it is to early to predict the impact of German monetary stimulus on the Eurozone economy. Lagarde said in the press conference after the policy decision on Thursday that increased defense and infrastructure spending is still a "work in progress" and the ECB "needs time" to understand the impact.

On Thursday, the ECB reduced its Deposit Facility rate by 25 basis points (bps) to 2.5%, as expected, but refrained from guiding the interest rate outlook. This was the fifth interest rate cut by the ECB in a row.

Meanwhile, the Pound Sterling (GBP) underperforms the Euro as Bank of England (BoE) Monetary Policy Committee (MPC) member Catherine Mann argued that the economy needs strong stimulus through swift policy-easing due to due to “substantial volatility” coming from financial markets, especially from “cross-border spillovers”.

Contrary to BoE Mann, other officials, including Governor Andrew Bailey, favored a gradual monetary expansion cycle as inflationary pressures are unlikely to squeeze out on their own accord while testifying before Parliament’s Treasury Committee.