EUR/GBP loses momentum below 0.8650 as traders brace for EU-US deal update

• EUR/GBP edges lower to near 0.8620 in Wednesday's early European session, down 0.21% on the day. 
• Trump said the EU will 'probably' receive new tariff rates on Thursday. 
• The overhang of mounting fiscal risks in the UK might weigh on the GBP and cap the downside for the cross. 

The EUR/GBP cross loses traction to around 0.8620 during the early European session on Wednesday. The Euro (EUR) softens against the Pound Sterling as renewed tariff threats from US President Donald Trump unsettle markets.

Trump said on Tuesday that the European Union (EU) will "probably" receive a letter setting its new US tariff rate on Thursday, adding that the US president said the bloc had shifted from being "very tough" to "very nice." 

These remarks came amid increased attempts by the EU to avoid sweeping "reciprocal tariffs" on its US exports, which were earlier scheduled to go into effect on Wednesday but have subsequently been pushed back to August 1. However, tariff uncertainty and fears of a trade war could undermine the shared currency in the near term. 

The European Central Bank (ECB) policymaker Boris Vujcic, one of the Governing Council's more hawkish members, said that the central bank mustn't be too concerned about a temporary undershooting of the 2% inflation target and shouldn't rush further interest-rate moves. Vujcic added that the ECB has the "luxury to wait," and incoming data will "determine what we are going to do." 

After eight quarter-point cuts in a year, ECB policymakers have hinted that the easing cycle is coming to an end. With inflation near the target and the economy so far resilient to multiple headwinds. The markets anticipate a pause this month, but at least one more reduction before the end of the year. Less dovish stance from the ECB might help limit the Euro's losses.  

On the other hand, the escalation in UK fiscal risks might cap the upside for the Pound Sterling. Last week, UK Chancellor of the Exchequer Rachel Reeves breached her own fiscal rules by raising the standard allowance for Universal Credit, which is estimated to raise the financial burden by £4.8 billion by fiscal year 2029-2030. According to a Barclays analysis, the UK government would most likely need to raise taxes in the Autumn Budget to address rising budgetary concerns.