EUR/GBP strengthens above 0.8675, traders brace for ECB rate decision

• EUR/GBP trades on a positive note around 0.8675 in Tuesday’s early European session, up 0.14% on the day. 

• The ECB is expected to hold rates at the July meeting on Thursday. 

• UK rate cut bets grow amid a cooling labor market and UK fiscal risks. 

The EUR/GBP cross edges higher to near 0.8675 during the early European session on Tuesday. The Euro (EUR) strengthens against the Pound Sterling (GBP) as the European Central Bank (ECB) is expected to hold the interest rate steady at its July meeting on Thursday. 

After eight quarter-point cuts that brought the deposit rate to 2%, ECB President Christine Lagarde said last month that the easing cycle is coming to an end. ECB policymakers believe they are well-positioned to deal with what comes next. "The central bank will now want to have more clarity on the trade outlook before it considers adjusting its policy further," said analysts from Italian bank UniCredit.

Trade tensions between the US and EU escalated after the Wall Street Journal (WSJ) reported that US President Donald Trump has demanded a higher baseline tariff in a range between 15% and 20% against 10%, which was being negotiated earlier. Meanwhile, the bloc stated that it is preparing retaliatory measures against the US if punitive trade tariffs are imposed. Tariffs and geopolitical uncertainty might weigh on the shared currency in the near term.

Persistent UK political and fiscal risks, along with a cooling labor market, might drag the GBP lower and create a tailwind for the cross. Money markets have priced in nearly an 89% odds that the BoE will lower borrowing costs in August, up from an 87% possibility before last week’s weaker UK employment data. Analysts expected the UK central bank to deliver two interest rate reductions by the end of the year, which would take the bank rate down to 3.75%.