The Euro is weakening against the British Pound, continuing a two-day decline. The drop is influenced by widespread criticism of the recent US-EU trade agreement, viewed as biased towards the US.
As of Tuesday, the EUR/GBP rate is around 0.8656, down nearly 0.20%, continuing Monday’s sharp reversal. Prior to the downturn, the pair reached its highest level since November 2023, at 0.8753.
US-EU Trade Agreement Criticism
The trade agreement, signed by US President Trump and European Commission President von der Leyen, has been criticised for being uneven. While the US secured large concessions, the EU is subject to a flat 15% tariff on many exports, increasing from an average of 1.2%.
Only certain EU exports avoid tariffs under a “zero-for-zero” clause, while US goods remain tariff-free in Europe. Steel and aluminum tariffs on EU exports to the US remain at 50%.
US President Trump and UK Prime Minister Starmer met recently to discuss bilateral trade, considering tariff adjustments. Trump showed willingness to ease tariffs on UK pharmaceuticals, but negotiations continue over industrial goods.
Eurozone Economic Outlook
The Eurozone’s economic calendar will soon include a preliminary GDP estimate and several sentiment indices. The data could impact short-term Euro trends, especially given the trade agreement controversy.
Based on the current environment, we believe the Euro will continue its decline against the British Pound. The new trade agreement has fundamentally damaged the Eurozone’s export outlook, creating a clear headwind. This suggests that the recent drop in the EUR/GBP pair is not a temporary reversal but the start of a new, lower trend.
We are positioning for a break below the key 0.8600 support level in the coming weeks. The latest German ZEW Economic Sentiment for July has already reflected this pessimism, plummeting to -5.2 against expectations of a positive reading, a clear reaction to the trade news. Historical data from late 2023 shows that once momentum builds, a move toward the 0.8500 handle is highly plausible.
Given this outlook, buying put options on EUR/GBP offers a defined-risk way to capitalize on further weakness. Three-month implied volatility for the pair has already jumped from around 5% to just over 8% in the past week, signalling that the market is bracing for significant price swings. This makes options an attractive tool for traders anticipating a continued slide.
The United Kingdom is in a comparatively better negotiating position, as evidenced by the bilateral talks between Starmer and his US counterpart. With UK inflation holding at a stubborn 2.9% and the Bank of England’s key rate at 4.75%, monetary policy remains tighter than in the Eurozone. This interest rate differential provides a strong tailwind for the Pound.
This week’s preliminary Eurozone Q2 GDP estimate will be a critical test for the market’s bearish sentiment. After the deal negotiated by von der Leyen, a growth figure below the 0.2% consensus forecast would confirm the economic drag. A significant miss here would almost certainly accelerate the pair’s downward trajectory.
