Euro strengthens against Pound amid ECB rate hike expectations

The EUR/GBP cross advanced during the early European session on Tuesday, gaining traction near 0.8665 as the British Pound weakened amid growing political uncertainty in the United Kingdom.

Investors are also awaiting the release of the ZEW economic sentiment surveys from Germany and the Eurozone later in the day, which could provide fresh direction for the Euro.

UK political instability pressures Pound

The British Pound came under pressure after UK Prime Minister Keir Starmer faced increasing calls to announce a timeline for his departure.

The pressure followed elections held across several parts of the country, where the ruling Labour Party reportedly suffered major losses.

Although Starmer stated that he would not resign, the political uncertainty surrounding his leadership created concerns in the market.

The resulting political “noise,” combined with rising UK gilt yields, added localized pressure on the Pound, allowing the Euro to strengthen against the British currency.

Market participants remain cautious as political developments in the UK continue to influence investor sentiment.

Analysts noted that uncertainty surrounding government leadership can often weigh on a currency by reducing confidence in the country’s economic and fiscal outlook.

ECB officials support further tightening

On the Euro’s side, expectations of additional interest rate hikes from the European Central Bank continued to support the common currency.

ECB Governing Council member Martin Kocher said on Monday that there was no reason to delay interest rate hikes if energy prices failed to improve quickly.

His comments reinforced expectations that policymakers remain concerned about inflationary risks linked to higher energy costs.

Last week, ECB Executive Board member Isabel Schnabel also strengthened market expectations for tighter monetary policy.

Schnabel said companies and households were reacting in a worrying manner to rising global energy prices, signaling that inflation pressures could remain elevated.

Her remarks increased speculation that the ECB could move toward another rate increase as early as next month.

Meanwhile, a report released by the European Central Bank on Thursday showed that the euro zone has made consistent progress in financial integration in recent years.

However, the report noted that equity markets across the bloc remain fragmented and continue to lag behind the advances seen in banking and debt markets.

The ECB and the European Commission are currently pushing for deeper regional integration and the development of a unified single market, starting with financial services.

Policymakers believe stronger financial integration could channel more household savings into investments and, over time, help support stronger economic growth across the euro zone.

Markets price in June rate hike

Financial markets are currently pricing in a 92% probability of a 25 basis point interest rate hike at the ECB’s June meeting.

Traders are also anticipating a total of three rate hikes by the end of 2026.

The growing divergence between the political uncertainty in the UK and the ECB’s hawkish tone has helped the Euro gain ground against the Pound.

Investors will now closely monitor the upcoming ZEW surveys from Germany and the Eurozone for further clues about economic sentiment and the potential direction of monetary policy in the region.