EUR/GBP gains as Pound pressured by UK fiscal worries

• The Euro strengthens against the British Pound on Friday, supported by broad-based Sterling weakness.
• UK fiscal concerns intensify after the welfare reform bill passes with reduced cost-saving measures.
• Eurozone PPI fell 0.6% MoM in May, easing price pressures and aligning with ECB’s cautious stance.

The Euro (EUR) strengthens against the British Pound (GBP) on Friday, as the Pound remains under pressure amid renewed fiscal concerns and political unease in the United Kingdom. Investors grew cautious after the UK government’s welfare reform package, approved with reduced cost-saving measures, reignited worries over the country’s fiscal credibility.

The EUR/GBP cross is ticking higher during the American trading hours, hovering near 0.8630 at the time of writing, underpinned by today’s broad-based weakness in the British Pound. The pair is paring some of the previous day’s losses and looks set to close the week in positive territory.

European Central Bank (ECB) President Christine Lagarde struck a confident yet cautious tone in her speech on Thursday, reaffirming the central bank’s strong commitment to its 2% inflation target. Lagarde said the ECB’s current interest rate path is “in a good position” following the recent rate cut, but emphasized that the Governing Council remains data-dependent and ready to act if inflation becomes more volatile. Her comments reinforced the ECB’s medium-term strategy, while also acknowledging that persistent global uncertainty could complicate the inflation outlook going forward.

While the Euro finds policy-driven support, the British Pound continues to face headwinds from renewed concerns over the UK’s fiscal outlook. Reuters reported that the welfare reform bill passed on Tuesday, but with significantly reduced cost-saving measures well below the initially projected £5 billion ($6.83 billion) in savings. This shortfall has sparked fresh concerns that the government may be forced to raise taxes or impose cuts elsewhere to meet fiscal targets.

S&P Global echoed these concerns, warning that the government’s failure to implement even modest welfare reductions reflects its “limited budgetary room for maneuver.”

On the data front, the latest figures showed a further easing in producer price inflation across the Eurozone. The Producer Price Index (PPI) declined by 0.6% on a monthly basis in May, following a sharper 2.2% drop in April and slightly exceeding market expectations of a 0.5% decrease. On an annual basis, industrial producer price inflation slowed to 0.3% in May, down from 0.7% in the previous month, broadly in line with forecasts.

Looking ahead, market attention is shifting to Bank of England “external member” Alan Taylor, who is scheduled to speak later today at 14:00 GMT. Taylor has previously signaled growing concern over the UK’s economic outlook, warning that the expected “soft landing” is increasingly under threat and calling for perhaps five rate cuts in 2025, one more than markets had priced in, citing weakening demand and global trade pressures. Investors will be closely tuning in for any fresh cues, particularly around his economic outlook and rate-cut guidance.