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EUR/GBP retreated after two days of gains and traded around 0.8600 in Asian trading on Tuesday. The British pound (GBP) gained momentum, supported by optimism over US-UK trade talks. British Prime Minister Keir Starmer is pushing for a trade deal with the United States after President Trump announced 10% tariffs on British goods and 25% tariffs on car, steel and aluminum imports.
However, the EUR/GBP cross found support after UK Consumer Price Index (CPI) data for March came in below expectations, increasing market expectations for a rate cut by the Bank of England (BoE) at its May policy meeting. Heightened global uncertainty is also fueling dovish expectations.
Markets are currently pricing in 86 basis points of BoE rate cuts by the end of the year, with a more than 50% chance of a fourth cut in December, according to LSEG. Weak inflation could give the central bank more room to support the economy, especially against the backdrop of rising household costs and ongoing global trade tensions, which could weigh on sterling.
On the euro front, downside pressure on the EUR/GBP cross was limited as a stronger euro (EUR) was supported by broad-based USD weakness. Concerns about the Federal Reserve’s independence were reignited by comments from President Trump and the director of his National Economic Council, who said Trump is still “studying” whether to replace Fed Chairman Jerome Powell.
The euro was also supported by rising expectations for increased defense spending in the euro zone, particularly in Germany. On the monetary policy front, the European Central Bank (ECB) cut its deposit rate by 25 basis points to 2.25%, its lowest level since early 2023, and dropped language describing its stance as “restrictive.” The ECB acknowledged that markets now expect three more rate cuts of 25 basis points by the end of the year as trade tensions escalate and the economic outlook deteriorates.
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