Summary:
EUR/GBP rises above 0.8500 as soft UK data boosts BoE rate cut bets, while hawkish ECB remarks provide support for the euro.
The euro strengthened against the pound on Friday, pushing the EUR/GBP cross higher to around 0.8525 in early European trading. This marks the fifth consecutive session of gains, driven largely by a combination of disappointing UK data and increasingly dovish expectations for the Bank of England's (BoE) monetary policy outlook.
Sterling came under pressure this week after a string of underwhelming economic indicators increased the likelihood of interest rate cuts by the BoE. Data released earlier in the week highlighted further deterioration in the UK labour market, which has prompted traders to price in a more accommodative policy stance.
A Reuters poll of economists now expects the BoE to cut interest rates by 25 basis points both in the third and fourth quarters of 2025. bringing the Bank Rate down to 3.75%. These expectations have weighed heavily on the pound, giving the euro space to climb.
In addition to labour market concerns, weaker-than-expected GDP and industrial production figures have further undermined the pound. According to the Office for National Statistics (ONS), the UK economy contracted by 0.3% in April following a modest 0.2% expansion in March. The reading missed expectations for a 0.1% decline, adding to concerns about the fragility of the UK's economic recovery.
Industrial production also posted disappointing results, contributing to the downward pressure on GBP across major currency pairs, including against the euro.
On the other side of the equation, recent hawkish rhetoric from European Central Bank (ECB) policymakers has provided support to the euro. ECB officials, including Frank Elderson and José Luis Escrivá, are scheduled to speak later today, with markets watching closely for any signals regarding the pace and direction of future policy moves.
Comments from Croatian central bank governor Boris Vujčić added to the hawkish tone, stating that the ECB is in a "very good position" and should await another round of forecasts before adjusting interest rates further. ECB President Christine Lagarde has also hinted that the central bank may be approaching the end of its easing cycle, suggesting a more cautious approach to further rate reductions.
Traders are now looking ahead to the release of key Eurozone economic data, including industrial production and trade balance figures for April. These data points could influence near-term market sentiment and determine whether the EUR/GBP cross continues to climb or faces some consolidation.
With the euro benefitting from relatively firmer fundamentals and a more cautious ECB stance, and the pound pressured by soft economic data and growing expectations of rate cuts, the EUR/GBP cross could remain supported in the short term. However, upcoming data releases and central bank commentary on both sides will be crucial in shaping the next move.
Disclaimer: This material is for general information purposes only and is not intended as (and should not be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by EBC or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person.
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