Euro gains against British Pound despite stronger UK growth data

• EUR/GBP edges higher as hawkish ECB expectations outweigh stronger-than-expected UK GDP data.
• Markets largely expect the ECB to raise rates again in September, while the BoE is seen staying on hold this year.
• Traders now look to next week’s UK CPI data for fresh clues on the BoE policy outlook.

EUR/GBP edges higher on Thursday as the Euro (EUR) draws support from hawkish European Central Bank (ECB) expectations, overshadowing stronger-than-expected UK Gross Domestic Product (GDP) data that would otherwise have supported the British Pound (GBP). At the time of writing, the cross trades around 0.8549, snapping a three-day losing streak.

Data released by the Office for National Statistics showed that the UK economy grew by 0.3% in June, while markets had expected no growth. The economy expanded by 0.4% in the second quarter, in line with forecasts but slower than the 0.6% growth seen in the first quarter. Compared with a year earlier, GDP rose by 1.2%, beating the 1.1% estimate and improving from 0.9%.

Analysts at Standard Chartered point out that UK GDP growth in Q2, which came in above the BoE’s July projection of “0.3% q/q”, is unlikely to be the primary driver of policy decisions. They argue that “inflation data (which has so far been well behaved) and labour-market data (still soft) are more important inputs to its thinking.” With policy settings already viewed as restrictive, Standard Chartered maintains its view that it “still expect[s] the BoE [to] keep rates on hold this year.”

Traders now look ahead to next week’s UK Consumer Price Index (CPI) data for fresh clues about the BoE’s policy outlook. At its latest meeting, most BoE policymakers said the tightening in financial conditions since the war in the Middle East began was providing “sufficient insurance” against inflation risks arising from higher energy prices.

In contrast, the same energy-driven inflation risks are reinforcing expectations that the European Central Bank (ECB) will deliver another rate hike in September.

A Reuters poll conducted from August 10 to 13 showed that 57 of 69 economists expect the ECB to raise its deposit rate by 25 basis points to 2.50% in September. Around 80% expect the rate to end the year at 2.50%, while 63% believe it will stay at that level until at least the third quarter of next year.