• EUR/GBP edges higher as the Euro gains support amid growing fears of a potential US recession.
  • The ECB also warned that US-imposed tariffs could severely impact economic growth, adding to expectations of further monetary easing.
  • UK PM Keir Starmer is working to secure a trade agreement with the US following Trump’s announcement of new tariffs.

EUR/GBP extends its gains for the second successive session, trading around 0.8600 during the Asian hours on Monday. The currency cross strengthens as the Euro (EUR) advances against its counterparts, supported by persistent weakness in the US Dollar (USD) amid rising concerns about a potential US recession and questions surrounding the Federal Reserve’s (Fed) independence.

However, the Euro faced challenges after the European Central Bank (ECB) cut interest rates for the seventh time in a year last week. The ECB also cautioned that economic growth could be significantly impacted by US tariffs, reinforcing expectations for further policy easing in the coming months.

Moreover, ECB policymaker Madis Müller noted that the decline in energy prices and the impact of tariffs supported the recent rate cut. Müller emphasized that monetary policy is no longer acting as a constraint and highlighted that key indicators are trending in the right direction. However, he also warned that increasing economic fragmentation could lead to upward pressure on prices.

The upside potential of the EUR/GBP cross may be capped as the Pound Sterling (GBP) also strengthens, buoyed by optimism over ongoing US-UK trade talks. UK Prime Minister Keir Starmer is aiming to secure a deal with the US following President Trump’s announcement of 10% tariffs on UK goods and a 25% levy on imports of automobiles, steel, and aluminum.

UK Prime Minister Keir Starmer and US President Donald Trump held their first conversation on Friday since the imposition of tariffs on UK goods, describing the trade talks as "ongoing and productive." According to a Downing Street official, Starmer reaffirmed his commitment to "free and open trade" while underscoring the importance of safeguarding the national interest.

Tariffs FAQs

Tariffs are customs duties levied on certain merchandise imports or a category of products. Tariffs are designed to help local producers and manufacturers be more competitive in the market by providing a price advantage over similar goods that can be imported. Tariffs are widely used as tools of protectionism, along with trade barriers and import quotas.

Although tariffs and taxes both generate government revenue to fund public goods and services, they have several distinctions. Tariffs are prepaid at the port of entry, while taxes are paid at the time of purchase. Taxes are imposed on individual taxpayers and businesses, while tariffs are paid by importers.

There are two schools of thought among economists regarding the usage of tariffs. While some argue that tariffs are necessary to protect domestic industries and address trade imbalances, others see them as a harmful tool that could potentially drive prices higher over the long term and lead to a damaging trade war by encouraging tit-for-tat tariffs.

During the run-up to the presidential election in November 2024, Donald Trump made it clear that he intends to use tariffs to support the US economy and American producers. In 2024, Mexico, China and Canada accounted for 42% of total US imports. In this period, Mexico stood out as the top exporter with $466.6 billion, according to the US Census Bureau. Hence, Trump wants to focus on these three nations when imposing tariffs. He also plans to use the revenue generated through tariffs to lower personal income taxes.

Source: Fxstreet