EUR/GBP holds gains near 0.8700 as Germany's tax revenues increase

• EUR/GBP holds steady after Germany's finance ministry reported a 2.6% YoY increase in federal and state tax revenues for September.
• Germany's economy shrank for second straight year in 2024, with the government forecasting modest growth of just 0.2% in 2025.
• The Pound Sterling may gain ground due to cautious BoE policy outlook.

EUR/GBP gains ground after two days of losses, trading around 0.8690 during the Asian hours on Tuesday. The currency cross appreciates as the Euro (EUR) could receive support after Germany's finance ministry reported that federal and state government tax revenues were up 2.6% year-over-year in September. However, the German ministry also added on Tuesday that tax revenues will not get a boost from economic momentum in the short term.

The largest economy in Europe contracted for the second consecutive year in 2024, with the government projecting only 0.2% growth for 2025. The report noted that leading indicators show no signs of "a noticeable acceleration in economic momentum in the short term," per Reuters.

However, the Euro struggled as traders weighed S&P Global Ratings' downgrade of France against improving global risk sentiment. S&P lowered France's credit rating to A+ from AA-, citing "elevated" budget uncertainty despite the government's submission of its 2025 draft budget.

The EUR/GBP cross may again lose ground as the Pound Sterling (GBP) may draw support from cautious tone surrounding the Bank of England's (BoE) policy outlook, driven by the persistent inflation in the United Kingdom (UK).

Traders will likely observe the UK Consumer Price Index (CPI) and Retail Sales data due on Wednesday to gain fresh impetus about whether the BoE will cut interest rates again in the remaining year. BoE Governor Andrew Bailey emphasized last month that the UK central bank was "not out of the woods yet" on inflation.

However, the UK labor market data for three months ending August showed a slowdown in wage growth and a further increase in the jobless rate. This has increased the likelihood that the BoE will cut borrowing rates again by year-end.