EUR/GBP moves below 0.8600, retreats due to optimism surrounding US-UK trade negotiations

• EUR/GBP retreats as Pound Sterling strengthens, driven by optimism over ongoing US-UK trade talks.
• UK PM Keir Starmer pushes to secure a trade agreement with the US, following President Trump's announcement of new tariffs.
• The Euro gains ground, supported by broad-based weakness in the US Dollar amid growing concerns over the Federal Reserve's independence.

EUR/GBP loses ground after two days of gains, trading around 0.8600 during the Asian hours on Tuesday. The Pound Sterling (GBP) is gaining traction, supported by optimism surrounding ongoing US-UK trade negotiations. UK Prime Minister Keir Starmer is pushing to finalize a trade deal with the US following President Trump's announcement of new tariffs--10% on UK goods and 25% on automobile, steel, and aluminum imports.

However, the EUR/GBP cross received support after softer-than-expected UK Consumer Price Index (CPI) data for March increased expectations of a Bank of England (BoE) rate cut at the May policy meeting. Heightened global uncertainty is also contributing to dovish expectations.

According to LSEG data, markets are now pricing in 86 basis points of BoE rate cuts by year-end, with a better-than-even chance of a fourth cut in December. Weaker inflation may give the central bank more room to support the economy amid rising household costs and persistent global trade tensions, potentially weighing on GBP performance.

On the Euro side, downside pressure on the EUR/GBP cross is limited as the Euro (EUR) gains ground, buoyed by broad-based US dollar weakness. Concerns about the Federal Reserve's independence have resurfaced after comments from President Trump and National Economic Council Director, who indicated that Trump is still "studying" whether to replace Fed Chair Jerome Powell.

The Euro is also drawing strength from rising expectations of increased defense spending across the Eurozone, particularly in Germany. On the monetary policy front, the European Central Bank (ECB) cut its deposit rate by 25 basis points to 2.25%--the lowest level since early 2023--and dropped language describing its stance as "restrictive." The ECB acknowledged a deteriorating economic outlook due to rising trade tensions, and markets are now pricing in three additional 25bps cuts by year-end.