The Euro (EUR) modestly outperformed the British Pound (GBP) on Friday, with EUR/GBP trading around 0.8633, following the release of weak UK Gross Domestic Product (GDP) data and hawkish signals from the European Central Bank (ECB) [2]. The UK's Office for National Statistics reported that the economy contracted by 0.1% month-on-month in April, reversing a 0.3% expansion in March and matching market expectations [2]. This slowdown complicates the outlook for the Bank of England (BoE), which is already contending with elevated inflation. The BoE's quarterly survey indicated that the public's median forecast for inflation over the next year rose to 4.0% from 3.2% in February [2].
Market participants are fully pricing in a hold at next week's BoE monetary policy meeting, with a Reuters poll showing that nearly 40% of economists expect at least one rate hike by year-end, while only six anticipate a 25-basis-point cut [2]. Scotiabank strategists noted that GBP/USD is consolidating recent gains around 1.3400, supported in the low 1.33s and capped near the 50-day moving average at 1.3469 [1]. They highlighted that domestic risk remains elevated ahead of next week's CPI, labor data, and the BoE decision, with markets pricing about 35 basis points of tightening by year-end [1]. Political risk is also heightened due to an upcoming by-election [1].
Meanwhile, the ECB raised interest rates by 25 basis points on Thursday and revised its inflation forecasts upward while trimming its growth outlook [2]. ECB policymaker Peter Kazimir stated that "the rate-hike mission is not yet complete" and warned of potential second-round effects, suggesting that June inflation data could be decisive for the July policy decision [2]. Nomura's European Economics team now expects three further 25bp ECB hikes by March 2027, taking the deposit rate to 3.00%, up from a previous terminal view of 2.50% [6]. The ECB's new forecasts project core HICP inflation to remain above target through 2028, even with additional rate hikes [6].
Analysts at Nomura's Global FX Strategy team believe that a more hawkish ECB path compared to the BoE should support the Euro against the Pound, maintaining a long EUR/GBP position and citing narrowing front-end rate differentials and UK political-fiscal risks as catalysts for a move toward 0.90 in the coming months [2].
Currency heat maps show the Euro was the strongest against the Swiss Franc, while the Pound underperformed against the Euro and other majors on the day [2].
CONCLUSION
The Euro's strength against the British Pound is underpinned by hawkish ECB policy signals and weak UK economic data. With the ECB expected to continue tightening and the BoE facing a challenging inflation-growth tradeoff, analysts see further upside for EUR/GBP. Market participants are closely watching upcoming UK data and central bank decisions for further direction.