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Pound struggles amid growing concerns about UK stagflation

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EURGBP extends its strength for the fourth consecutive day, trading near 0.8410 during Monday’s European session. The cross gains traction as the Pound Sterling continues to underperform, weighed down by concerns over stagflation in the UK amid persistent inflation and stagnant economic growth.

A recent surge in government bond yields has sparked worries about the country’s fiscal health. The 30-year UK gilt yield has climbed to 5.36%, its highest level since 1998, intensifying challenges for Chancellor of the Exchequer Rachel Reeves and further dampening sentiment around the GBP.

Investors have been offloading UK gilts, driven by fears of mounting debt, sluggish growth, and inflation risks. These concerns contribute to the GBP’s relative weakness, supporting a bullish outlook for the EURGBP cross.

In the Eurozone, growing expectations of further policy easing by the European Central Bank weigh on the Euro and limiting the upside of the EURGBP cross.

Traders adopt caution amid uncertainty that protectionist policies under US President-elect Donald Trump’s administration will lead to a global trade war, diminishing the appeal of risk-sensitive assets like the Euro.

Speaking at the Asian Financial Forum (AFF) 2025 on Monday, ECB Chief Economist Philip Lane stated that additional interest rate cuts are likely as the central bank aims to prevent the economy from slowing down excessively.

Lane emphasised the importance of adopting a balanced approach, being “neither too aggressive nor too cautious” in policymaking this year.

At the same event, ECB policymaker Olli Rehn highlighted the need for Europe to avoid being caught off guard by a potential trade war, stressing that the EU should not bear the brunt of tariffs.

Rehn also supported the continuation of rate cuts, considering them a prudent course of action.

(Source: OANDA)