Euro rises against Pound Sterling as US-Iran diplomacy drives Oil lower
EUR/GBP trades with a mild bullish bias on Tuesday as falling Oil prices help the Euro (EUR) outperform most of its major peers. At the time of writing, the cross trades around 0.8357, up 0.10% on the day, but remains range-bound near levels last seen in April 2025.
On Tuesday, the British pound slipped against the US dollar, while the euro remained stable, as traders priced in the likelihood of the Federal Reserve tightening monetary policy. The pound fell 0.03% to $1.3434, while the euro rose 0.06% to $1.1231, according to data from 04:13 ET (09:13 GMT). The greenback's recent decline, driven by hopes of improved U.S.-Iran relations and lower oil prices, appears to be a temporary pause rather than a lasting shift.
Analyst Chris Turner of ING noted that the dollar is likely to benefit from robust U.S. growth, high inflation, and a Federal Reserve poised to tighten monetary policy before rates ease next spring as inflation declines. HSBC's Daily FX Focus reported the dollar index at 101.67, down 0.12% week-over-week but up 3.46% so far in 2023.
Turner expects the Federal Reserve to maintain a hawkish stance in the first quarter, as strong U.S. growth and inflation above 3% keep money markets pricing in the threat of an extended tightening cycle. He anticipates significant rate cuts in the second quarter once energy-driven inflation declines and the Federal Reserve's 2% inflation target is met.
The pound's gain was largely due to dollar weakness, with no key UK economic data released to drive the currency higher. The Bank of England raised interest rates this month, and HSBC's technical analysis suggests GBP/USD support at $1.3304 and resistance at $1.3541. Euro gains were observed despite a dip in eurozone investor confidence, as measured by the Sentix index, which fell to 2.4 from 2.7.
The European Central Bank held steady on interest rates during its October meeting. Turner believes the euro could rally between $1.10 and $1.15 over the next four to five months, driven by a risk premium ahead of France's April elections. HSBC sets support at $1.1127 and resistance at $1.1296 for the euro, with a potential 1.18 level by year-end 2027 if U.S. rates soften, energy prices stabilize, and French politics become clearer.
Potential shifts could arise from an AI-driven dollar depreciation, estimated at 6% by the IMF, or a liquidity squeeze triggering a short-term rally. A decisive Marine Le Pen victory in April, coupled with budget clarity or a positive overseas growth surprise, could spur a rotation into European assets and accelerate the euro's rally.
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