In the currency markets, the EUR/GBP pair has been on an upward trajectory, continuing its rally for the fifth consecutive session. During Wednesday’s European trading hours, it edged closer to the 0.8600 mark. This upward movement is primarily driven by a wave of optimism regarding the potential easing of global trade tensions.
Trump’s Remarks Spark Hopes for Trade Resolution
US President Donald Trump’s indication of a willingness to negotiate with international partners has significantly improved the global trade sentiment. His statements have raised hopes that the ongoing trade disputes could be de – escalated. Adding to this optimism, US Treasury Secretary Scott Bessent revealed that nearly 70 countries had reached out to discuss tariff measures. This flurry of activity around potential trade negotiations has provided a major boost to the EUR/GBP pair.
EU’s Retaliatory Tariffs Loom Large
Despite the positive outlook on trade negotiations, the European Commission is gearing up for potential retaliation. It is preparing to impose tariffs of up to 25% on US exports worth approximately €22.1 billion. EU Commission President Ursula von der Leyen, in a recent discussion with Chinese Premier Li Qiang, proposed a “negotiated resolution” to address the disruptions caused by US tariffs. However, the threat of these retaliatory tariffs still hangs over the market, adding an element of uncertainty.
Dovish ECB Expectations and Their Impact
The expectations of a dovish stance from the European Central Bank (ECB) are also influencing the EUR/GBP pair. Policymakers from various Eurozone countries, such as Italy’s Piero Cipollone, France’s François Villeroy de Galhau, and Greece’s Yannis Stournaras, have signaled their support for further monetary easing. Ahead of the crucial Eurozone finance ministers’ meeting in Warsaw on Friday, Stournaras emphasized that new tariffs would not prevent an expected April rate cut. He estimated that the tariffs could potentially drag Eurozone GDP down by 0.3% – 0.4% in the first year. This dovish sentiment is putting downward pressure on the Euro, which in turn affects the EUR/GBP pair.
Pound Sterling’s Resilience and BoE Rate Cut Bets
On the other side of the EUR/GBP equation, the Pound Sterling (GBP) is finding support from rising UK gilt yields. The 10 – year yield is hovering around 4.66%, which is providing a floor for the Pound. Additionally, while US tariffs pose risks to the UK economy, its relatively limited 10% exposure and the potential to replace disrupted suppliers could mitigate the impact. The UK government anticipates that the direct impact on GDP will be less than 0.1%.
Furthermore, expectations for Bank of England (BoE) rate cuts have solidified. The market now fully expects a rate cut in May, a significant increase from the previous 50% probability. Moreover, traders are pricing in three rate cuts by the end of 2025. These expectations are also contributing to the dynamics of the EUR/GBP pair.
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