Euro steadies vs British Pound as German political uncertainty, PMIs cap direction
EUR/GBP trades around 0.8575 on Monday at the time of writing, virtually unchanged on the day. The Euro (EUR) struggles to regain bullish momentum against the British Pound (GBP), as political concerns in Germany partly offset support from falling Oil prices.
As of Monday, the EUR/GBP exchange rate sits at 0.8575, showing little change throughout the day. The Euro (EUR) is finding it challenging to gain bullish ground against the British Pound (GBP) due to political instability in Germany and supportive oil price declines. Chancellor Friedrich Merz's party fared poorly in recent regional elections, which sparked political turmoil.
Despite describing the outcome as a "disaster," Merz insisted on staying in office and continuing the existing economic reforms. This political uncertainty is keeping investors on edge as the week begins. Meanwhile, lower oil prices serve as a counterbalance for the common currency. Brent crude prices dipped below $100 and were more than 8% lower than last week's peaks.
Falling energy costs generally benefit Eurozone economies, which rely heavily on energy imports, by easing pressure on businesses and consumers. Investors are also closely monitoring the monetary policies of two major institutions: the European Central Bank (ECB) and the Bank of England (BoE). ECB President Christine Lagarde emphasized that interest-rate decisions will be based on economic data and determined on a case-by-case basis.
In the UK, BoE Governor Andrew Bailey hinted that additional monetary tightening might be necessary, helping the British Pound retain some support. Rabobank strategists expect an interest rate increase by the ECB in December, anticipating a 25 basis points rise to 2.75%. They argue that this move isn't a sign of a more aggressive policy response but a measured reaction to an "additional energy shock" that impacts inflation more intensely and earlier than economic activity.
While acknowledging potential risks from persistently high energy prices, Rabobank forecasts just one further hike. They stress that any rate increases above the current 2.50% should be viewed as temporary, with the ECB likely reverting these changes in the second half of 2027. Market focus now shifts to this week's macroeconomic calendar, with Christine Lagarde set to address the press in Frankfurt later on Monday.
Preliminary September Purchasing Managers Index (PMI) data for the Eurozone and the UK, released on Wednesday, could provide new insights into economic momentum in both regions and potentially give the EUR/GBP pair a clearer directional cue.
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