EUR/GBP Holds Ground Near 0.8550 Amid ECB and BoE’s Monetary Policy Battle

The EUR/GBP pair found some buying interest around the 0.8535 level on Friday but struggled to fully capitalize on the slight intraday uptick. Instead, it remained range-bound within the previous day’s trading range.

While spot prices managed to stay above the lowest point since August 2022, which was reached on Thursday, they currently hover around the 0.8550-0.8555 range, marking a less than 0.10% gain for the day.

In the recently released minutes of the European Central Bank’s (ECB) June meeting, it became evident that the Governing Council is determined to prolong the current hiking cycle beyond July, aiming to bring inflation back to its target.

Notably, the ECB had previously projected that inflation would remain above the 2% target until the end of 2025. This hawkish stance to combat inflation offsets the emerging signs of an economic slowdown, supporting the shared currency and subsequently providing some backing for the EUR/GBP cross.

However, the potential for the Bank of England (BoE) to adopt a more aggressive approach to tighten its monetary policy in response to persistently high inflation acts as a cap on the EUR/GBP pair’s upside.

Market expectations suggest that the BoE might increase interest rates from the current 5% to a peak of 6.5% in an effort to curtail demand and push inflation lower.

Speculation regarding this outcome gained momentum following robust UK wage growth data, which both BoE Governor Andrew Bailey and UK Finance Minister Jeremy Hunt stated were hindering inflation containment efforts.

This situation overshadows the possibility of a UK recession later this year and provides support for the British Pound (GBP), ultimately limiting the upside potential for the EUR/GBP pair. On Thursday, data revealed that the British economy contracted by 0.1% in May compared to April.

Although the figure was better than market expectations, it allows the BoE to continue raising interest rates in the upcoming months. Consequently, it would be prudent to wait for substantial follow-through buying before confirming that the EUR/GBP pair has reached its lowest point and considering fresh bullish positions.

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