The euro is likely to remain under pressure in the near term due to ECB easing measures, geopolitical risks, and economic divergences. In contrast, the gradual tightening by the BoE provides support for the pound; however, caution is warranted regarding any weakness in key economic data, as it could raise market expectations of a potential rate cut.

EUR: Remain under pressures

The euro faces ongoing challenges, with several factors aligning to weigh on its performance. Recent softness in the euro began with weaker economic data, prompting sequential ECB rate cuts and raising concerns about political stability in key economies like France and Germany. Additionally, looming trade tensions with the US are amplifying downside risks. The market is already pricing in multiple ECB rate cuts for 2025, though the extent of these will depend on upcoming political developments, inflation trends, and growth dynamics.

European inflation data released yesterday showed headline inflation rising to 2.4% in December, while core inflation remained stable at 2.7%. A further increase in inflation appears likely in the first quarter, prompting the ECB to maintain a cautious easing approach and reducing the credibility of “behind the curve” concerns. However, this is unlikely to prevent a rate cut in January, though a 50bp cut now seems less probable.

EUR/USD has already dropped significantly—nearly 9% since late September—indicating that much of the negative sentiment around incoming US policies may already be reflected in the exchange rate. However, the lack of a year-end rally or short-covering in euro positions signals that bearish momentum remains intact. Trade tariffs expected to be announced by President Trump on China, Europe, Mexico, Canada, and potentially Vietnam are likely to further reinforce this trend, especially as these measures can be implemented without congressional approval.

Other external pressures, such as the rise in TTF gas prices linked to Ukraine’s pipeline shutdown, add to the euro’s vulnerabilities. Elevated energy costs increase economic strain in the eurozone, undermining confidence in the region’s growth outlook. Despite occasional technical rebounds, the euro remains unattractive in the longer term, with another leg lower—potentially toward the 1.0200 mark—remaining plausible before any meaningful recovery.

In summary, the euro is expected to remain under pressure in the near term due to ECB easing, geopolitical risks, and external economic divergences. While volatile inflation data and other short-term catalysts might offer temporary support, the broader outlook points to continued weakness, with markets closely monitoring the potential impact of Trump’s policies.

GBP: A bit danger, but better than euro

The GBP outlook appears constructive on crosses such as EUR/GBP and GBP/CHF, though it may remain under pressure against the USD. Sterling’s favorable carry and relative resilience, particularly in procyclical environments, provide support for its performance in cross-pair trades. However, further momentum would benefit from additional positive catalysts.

Sterling has shown strength, ranking second in G10 FX returns for December, driven by persistently high inflation, unexpected wage growth, and its relative insulation from trade and tariff uncertainties. The Bank of England’s cautious policy stance reflects concerns over weaker growth and labor market challenges, with a dovish vote split at the last meeting signaling downside risks. Recent data, such as the softer-than-expected UK Manufacturing PMI, further highlights the fragile economic landscape, which could limit Sterling’s ability to outperform regionally.

Nevertheless, factors such as the upcoming Autumn budget, which may provide medium-term economic support, and Sterling’s procyclical behavior in global markets offer a constructive backdrop. While the outlook for GBP crosses remains favorable, particularly against currencies like the EUR or CHF, its performance against the USD is likely to be constrained, given the dollar’s prevailing strength.

EUR/GBP 4H Chart