Pound&Euro Outlook Economic and Policy Divergence

The EURGBP exchange rate has slightly declined during early Asian trading on Friday, hovering near 0.8490 after posting gains in the previous sessions. The Pound found some support amid optimism about a potential UK-U.S. trade deal, though the outlook remains uncertain due to ongoing economic concerns. Meanwhile, the Euro continues to face downward pressure as expectations grow for further rate cuts by the European Central Bank (ECB).

The British Pound received some positive momentum, driven by hopes that the UK could secure a favorable trade agreement with the U.S. The market sentiment was supported by the notion that reciprocal tariffs under Donald Trump’s trade policies would have a limited impact on the UK, which faces the lowest additional U.S. duty at just 10%. Despite this optimism, economic uncertainty remains, particularly in the face of weaker-than-expected UK data and mixed corporate earnings.

UK manufacturing, for example, showed continued contraction in April, with export orders seeing their sharpest decline in nearly five years. Rising costs from U.S. tariffs and increased domestic taxes have pressured the economy, leading to a cautious market tone. The Bank of England (BoE) has acknowledged these risks and, as a result, markets are increasingly betting on a rate cut at the May 8 meeting.

On the Eurozone side, the Euro faces its own set of challenges. There are growing expectations that the ECB will cut rates further, with markets nearly fully pricing in a 25 basis-point cut at the June meeting. This reflects concerns over slowing inflation and growth in the region, exacerbated by the impact of U.S.-imposed tariffs on Europe. The Eurozone’s first-quarter GDP report showed growth of 0.4%, slightly outperforming expectations, but this was not enough to lift the Euro significantly.

This week, the focus for GBPEUR will be the BoE’s policy meeting and any signals it may give regarding future rate cuts. While a 25 basis-point cut is largely priced in, further easing could weigh on Sterling. For Euro traders, the upcoming industrial data from Germany will be crucial. Any signs of weakness in factory orders and production could dampen the Euro’s performance.

As we move forward, the divergence in policy between the BoE and the ECB could lead to further volatility in the GBPEUR exchange rate. If the ECB signals a more cautious approach while the BoE becomes more dovish, the Euro may gain an advantage over the Pound. This could result in further weakness for GBPEUR in the coming weeks, especially if the trade negotiations between the UK and the U.S. stall.

In conclusion, the outlook for GBP/EUR is clouded by economic uncertainty in both the UK and Eurozone, compounded by diverging central bank policies. While the U.K. seeks a trade deal with the U.S. and the ECB weighs further rate cuts, the market remains cautious. Traders will be closely monitoring the upcoming central bank meetings and economic data, which will likely determine the next directional move for the GBPEUR pair.