EUR/GBP moves below 0.8500 as Pound Sterling rises on potential UK-US trade agreement
- The EUR/GBP pair weakens as the Pound Sterling strengthens on rising optimism over a potential UK-US trade agreement.
- BoE Governor Bailey highlighted the risks stemming from intensifying global trade tensions, urging policymakers to factor these into future decisions.
- The Euro remains under pressure amid growing expectations of additional rate cuts by the European Central Bank.
EUR/GBP edges slightly lower during Asian trading on Friday, hovering around 0.8490 after posting gains in the previous two sessions. The Pound Sterling (GBP) found support amid growing optimism that the UK could secure a trade agreement with Washington.
Market sentiment was further bolstered by expectations that the impact of reciprocal tariffs under Donald Trump’s trade policies would be limited, given that the UK faces the lowest additional US duty of just 10% among major trading partners.
Despite this, downside pressure on the EUR/GBP pair may be capped, as the British Pound continues to encounter headwinds from ongoing economic uncertainty. Recent UK economic data has been underwhelming, and corporate earnings have offered mixed signals, contributing to a cautious market tone.
In April, UK manufacturing struggled, with final PMI data confirming continued contraction. Export orders saw their sharpest decline in nearly five years, pressured by rising costs from US tariffs and increased domestic employer taxes.
Adding to the cautious outlook, Bank of England (BoE) Governor Andrew Bailey flagged the risks posed by escalating global trade tensions, urging consideration of such factors in future policy decisions. These concerns have led traders to increase bets on a BoE rate cut at the upcoming May 8 policy meeting. Markets have priced in a near-96% probability of a 25 basis point reduction to 4.25%, according to a Reuters poll.
Meanwhile, the Euro (EUR) remains under pressure as expectations grow for further rate cuts by the European Central Bank (ECB). Market participants have nearly fully priced in a 25 basis-point cut at the ECB’s June meeting, with policymakers forecasting slower inflation and economic growth amid the impact of US-imposed tariffs on Europe.
Risk sentiment FAQs
In the world of financial jargon the two widely used terms “risk-on” and “risk off'' refer to the level of risk that investors are willing to stomach during the period referenced. In a “risk-on” market, investors are optimistic about the future and more willing to buy risky assets. In a “risk-off” market investors start to ‘play it safe’ because they are worried about the future, and therefore buy less risky assets that are more certain of bringing a return, even if it is relatively modest.
Typically, during periods of “risk-on”, stock markets will rise, most commodities – except Gold – will also gain in value, since they benefit from a positive growth outlook. The currencies of nations that are heavy commodity exporters strengthen because of increased demand, and Cryptocurrencies rise. In a “risk-off” market, Bonds go up – especially major government Bonds – Gold shines, and safe-haven currencies such as the Japanese Yen, Swiss Franc and US Dollar all benefit.
The Australian Dollar (AUD), the Canadian Dollar (CAD), the New Zealand Dollar (NZD) and minor FX like the Ruble (RUB) and the South African Rand (ZAR), all tend to rise in markets that are “risk-on”. This is because the economies of these currencies are heavily reliant on commodity exports for growth, and commodities tend to rise in price during risk-on periods. This is because investors foresee greater demand for raw materials in the future due to heightened economic activity.
The major currencies that tend to rise during periods of “risk-off” are the US Dollar (USD), the Japanese Yen (JPY) and the Swiss Franc (CHF). The US Dollar, because it is the world’s reserve currency, and because in times of crisis investors buy US government debt, which is seen as safe because the largest economy in the world is unlikely to default. The Yen, from increased demand for Japanese government bonds, because a high proportion are held by domestic investors who are unlikely to dump them – even in a crisis. The Swiss Franc, because strict Swiss banking laws offer investors enhanced capital protection.
Author
Akhtar Faruqui
FXStreet
Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.
