EUR/GBP slumps to near 0.8460 as Pound Sterling outperforms across the board

• EUR/GBP declines to near 0.8460 as the Pound Sterling gains in a dismal market mood.
• The BoE is almost certain to reduce interest rates by 25 bps to 4.25% on Thursday.
• Conservative Merz failed to secure a majority in the lower house of Germany.

The EUR/GBP pair falls sharply to near 0.8460 during North American trading hours on Tuesday, the lowest level seen in a month. The pair slumps as the Pound Sterling (GBP) outperforms its peers in a risk-off market sentiment.

The market sentiment indicates an asset-specific action after United States (US) President Donald Trump threatens to impose tariffs on pharmaceutical imports.

This week, the major trigger for the British currency is the Bank of England's (BoE) interest rate decision, which will be announced on Thursday. According to analysts at Bank of America (BofA), the BoE will cut borrowing rates by 25 basis points (bps) to 4.25%, with a majority vote of 8-1. The BofA expects that Monetary Policy Committee (MPC) member Swati Dhingra to vote for a larger-than-usual interest rate reduction of 50 bps.

Additionally, market experts believe that the BoE could roll back its "gradual policy easing" reference and revise its Gross Domestic Product (GDP) forecast lower in the face of global economic uncertainty due to US President Trump's tariff policy.

In the Eurozone, Conservative leader Friedrich Merz fails to secure an absolute majority in the Bundestag, short six seats from the 316 threshold, despite the CDU/CSU bloc and Social Democrats collectively commanding 328 votes in the lower house. This has prompted fears of political instability in Germany, resulting in a sharp sell-off in the nation's indices and pressure on the Euro (EUR).

Another reason behind the Euro's underperformance is uncertainty over trade relations between the European Union (EU) and the US. A Bloomberg report showed on Tuesday that the EU plans to target about €100 billion worth of US imports with additional tariffs if they fail to reach a deal with the US. The report also stated that proposed measures will be shared with member states midweek, but discussions are expected to continue for a month before a final decision is made.