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The sell-off of British bonds triggered fiscal concerns and limited the euro's decline. EUR/GBP fell to 0.8650 but did not lose key support

2025-07-03 15:35:30

The euro fell slightly against the pound on Thursday, trading around 0.8650, down 0.20% from the previous day. The volatility of market risk sentiment and the uncertainty of US-EU tariff negotiations have increased the pressure on the euro, while the pound has been restrained by the sharp fluctuations in the UK bond market and doubts about the fiscal outlook, resulting in the EUR/GBP not losing support significantly after a short-term decline.

As for the euro, rising inflation has caused the market to lower its expectations for the ECB's easing this year. The eurozone's June CPI data showed that overall inflation rebounded to 2.0%, reaching the target level set by the ECB.

The market currently only expects one more rate cut to 1.75% this year, after which the interest rate may enter a period of maintenance, and may not be raised again until the end of 2026. This makes the euro policy outlook neutral and hawkish, providing some support.
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However, the uncertainty of the US-EU trade negotiations has become the main risk suppressing the euro. The United States has presented the latest trade proposal to the EU negotiating team, and further updates are expected on Friday, but the tariff strategy led by the Trump administration is still highly uncertain. If no agreement is reached in the end, the euro may face a new round of selling pressure.

"Unsatisfactory trade negotiations and unstable inflation expectations are eroding external trust in the eurozone," said one European policy observer.

As for the pound, the recent UK bond market has suffered the largest sell-off since October 2022, raising questions about the government's fiscal commitments. In particular, after the new Labour government came to power and scaled back its welfare cuts, the market was concerned that its credibility in reducing the deficit was damaged, and investors were cautious about the pound.

Marc Chandler, chief strategist at Bannockburn Global FX, said: "Not only has the pound fallen sharply, but UK government bonds are also experiencing a severe sell-off, reflecting the market's crisis of confidence in the Labour government's fiscal plan."

A surge in UK bond yields further weighed on the pound's appeal and limited losses for EUR/GBP.

From a technical perspective, EUR/GBP has fallen from the high of 0.8695, but still remains above the 20-day moving average (0.8645). If it falls below the support area of 0.8640~0.8630, it may trigger a technical adjustment and look down to the integer of 0.8600.

On the upside, short-term resistance is at 0.8680 and 0.8700. After breaking through, it will challenge the intraday high of 0.8740 again. The RSI is near 52, and the momentum is neutral, indicating that the exchange rate will mainly fluctuate in the range in the short term, and it is necessary to wait for data or event-driven breakthroughs.
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Editor's opinion:

The euro against the pound is currently subject to the asymmetric intersection of bilateral political and economic risks. The euro benefits from the ECB's hawkish-dovish balance strategy, but faces uncertainty in US-EU trade negotiations; the pound is torn between economic resilience and fiscal concerns, and turmoil in the government bond market may increase policy pressure.

In the short term, we will focus on official news from the UK and the EU, as well as the service industry PMI and the progress of the US-EU agreement as key clues for directional judgment.
Risk Warning and Disclaimer
The market involves risk, and trading may not be suitable for all investors. This article is for reference only and does not constitute personal investment advice, nor does it take into account certain users’ specific investment objectives, financial situation, or other needs. Any investment decisions made based on this information are at your own risk.

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