EUR/GBP softens to below 0.8450 on increased tariff tensions

EUR/GBP edges lower to 0.8445 in Tuesday’s early European session.
EU said it will prioritize negotiations with the US to resolve trade disputes.
A gradual and careful approach from the BoE supports the Pound Sterling.

Lallalit Srijandorn FXStreet

The EUR/GBP cross loses ground to near 0.8445, snapping the three-day winning streak during the early session on Tuesday. The Euro (EUR) weakens against the Pound Sterling (GBP) amid the renewed trade tensions. Traders brace for the preliminary reading of the Harmonized Index of Consumer Prices from the Eurozone, which is due later on Tuesday.

The EU said on Monday that it would make a strong case this week for the US to reduce or eliminate tariffs even after Trump said he would double import duties on steel and aluminium to 50%, effective on Wednesday. Traders will closely monitor the developments surrounding the US-EU negotiation, as the Trump administration has asked its trade partners to submit their best offers in order to finalize deals before July 8. Any signs of trade talks progress could help limit the shared currency’s losses.

The European Central Bank (ECB) is widely expected to cut its policy rate by another 25 basis points (bps) at its June meeting, bringing its deposit rate to 2.00%. Traders will take more cues from the speech from the ECB President Christine Lagarde later on Tuesday. The dovish remarks from Lagarde might weigh on the EUR’s downside.

On the other hand, the rising expectation that the Bank of England (BoE) will pause its interest rate reductions could underpin the GBP and act as a headwind for the cross. The futures markets have priced in borrowing rates to fall by around 38 bps by the end of this year, implying one 25 bps rate cut and a roughly 50% chance of a second reduction, according to a report from Reuters.

ECB FAQs

What is the ECB and how does it influence the Euro?

The European Central Bank (ECB) in Frankfurt, Germany, is the reserve bank for the Eurozone. The ECB sets interest rates and manages monetary policy for the region. The ECB primary mandate is to maintain price stability, which means keeping inflation at around 2%. Its primary tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Euro and vice versa. The ECB Governing Council makes monetary policy decisions at meetings held eight times a year. Decisions are made by heads of the Eurozone national banks and six permanent members, including the President of the ECB, Christine Lagarde.

What is Quantitative Easing (QE) and how does it affect the Euro?

In extreme situations, the European Central Bank can enact a policy tool called Quantitative Easing. QE is the process by which the ECB prints Euros and uses them to buy assets – usually government or corporate bonds – from banks and other financial institutions. QE usually results in a weaker Euro. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The ECB used it during the Great Financial Crisis in 2009-11, in 2015 when inflation remained stubbornly low, as well as during the covid pandemic.

What is Quantitative tightening (QT) and how does it affect the Euro?

Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the European Central Bank (ECB) purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the ECB stops buying more bonds, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Euro.

Author

Lallalit Srijandorn

FXStreet

Lallalit Srijandorn is a Parisian at heart. She has lived in France since 2019 and now becomes a digital entrepreneur based in Paris and Bangkok.

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