13 Jan 2025

• EUR/GBP extends its upward momentum as the Pound Sterling struggles amid mounting concerns over stagflation in the UK.
• The Pound Sterling faces challenges as a 30-year UK gilt yield has climbed to 5.36%, its highest level since 1998.
• ECB Lane indicated that further rate cuts are probable as the central bank seeks to avoid a slowdown in economy.
• EUR/GBP continues to demonstrate strength for the fourth consecutive day, trading close to 0.8410 during the European session on Monday. The currency pair is gaining momentum as the Pound Sterling (GBP) struggles, hindered by worries regarding stagflation in the United Kingdom (UK), characterized by ongoing inflation and stagnant economic growth.
• A recent increase in UK government bond yields has raised concerns regarding the nation's fiscal stability. The yield on the 30-year UK gilt has reached 5.36%, marking its highest point since 1998, which exacerbates the difficulties faced by Chancellor of the Exchequer Rachel Reeves and further undermines confidence in the GBP.
  
  Investors have been divesting from UK gilts, motivated by apprehensions over rising debt levels, sluggish economic growth, and inflationary pressures. These issues contribute to the relative weakness of the GBP, fostering a positive outlook for the EUR/GBP exchange rate.
  
  In the Eurozone, increasing expectations for additional policy easing by the European Central Bank (ECB) are exerting downward pressure on the Euro, thereby limiting the potential gains of the EUR/GBP cross. Traders are exercising caution amid uncertainties regarding the potential for protectionist measures under the administration of US President-elect Donald Trump, which could trigger a global trade conflict and reduce the attractiveness of risk-sensitive assets such as the Euro.
  
  During his address at the Asian Financial Forum (AFF) 2025 on Monday, ECB Chief Economist Philip Lane indicated that further interest rate reductions are probable as the central bank seeks to avert excessive economic slowdown. Lane underscored the necessity of a balanced approach, advocating for a stance that is "neither too aggressive nor too cautious" in policymaking this year.
  
  At the same forum, ECB policymaker Olli Rehn emphasized the importance of Europe being prepared for the possibility of a trade war, asserting that the European Union (EU) should not disproportionately absorb the impact of tariffs. Rehn also endorsed the continuation of rate cuts, viewing them as a prudent strategy.