EUR/GBP advances to near 0.8450 as EU moves to increase defense spending

• EUR/GBP extends its winning streak as the European Union considers boosting defense spending through joint borrowing and EU funds.
• Germany’s Green Party may negotiate a defense spending agreement with the expected ruling coalition, led by Chancellor-in-waiting Friedrich Merz.
• The Pound Sterling found support after BoE’s Mann dismissed the need for a “gradual and cautious” approach to monetary easing.

EUR/GBP continues its winning streak that began on March 3, trading around 0.8440 during the European hours on Tuesday. The currency cross continues to strengthen as the European Union (EU) explores ways to bolster defense spending through joint borrowing, EU funds, and an expanded role for the European Investment Bank (EIB), with key decisions expected by June.

Germany’s Green Party is open to negotiations and aims to reach an agreement by the end of the week in its dispute over defense spending with the country’s likely next ruling coalition, led by Chancellor-in-waiting Friedrich Merz. “Of course, we are ready to negotiate,” said Green Party co-leader Franziska Brantner in a Bloomberg TV interview on Tuesday.

Earlier, German leaders agreed to relax the borrowing limit, known as the “debt brake,” and establish a €500 billion infrastructure fund to boost defense spending and drive economic growth. Meanwhile, Italy is set to propose a European guarantee scheme that could unlock up to €200 billion ($216.48 billion) in investments for the defense and aerospace industries, according to Reuters.

These large-scale economic stimulus measures have prompted traders to scale back expectations of two additional interest rate cuts by the European Central Bank (ECB) this year, as the potential inflationary impact could limit the scope for further easing.

However, the upside for the EUR/GBP cross may be capped as the Pound Sterling (GBP) remains supported by last week’s cautious remarks from Bank of England (BoE) Monetary Policy Committee (MPC) member Catherine Mann. She dismissed the need for a “gradual and cautious” approach to monetary easing, citing rising global economic volatility.

Before Mann’s comments, four BoE officials, including Governor Andrew Bailey, had advocated for a measured approach to reducing monetary policy restrictiveness, emphasizing that inflation persistence is unlikely to ease “on its own accord.”