EUR/GBP extends losses on ECB dovish tone, trades around 0.8570

EUR/GBP continues the losing streak despite a 25 basis points (bps) rate hike by the European Central Bank (ECB) on Thursday. The spot price is trading lower around 0.8570 during the Asian session on Friday. The Euro is experiencing downward pressure on the ECB’s dovish tone.

The ECB is indicating that the current rate hike cycle may have reached its peak, advising caution and citing expectations of a decline in inflation in the upcoming months. Additionally, the ECB is highlighting the presence of downside risks for the Eurozone’s bloc, particularly as the services sector experiences weakness.

However, ECB President Christine Lagarde has made it clear that she's not explicitly stating that the European Union (EU) has reached the peak of its interest rate cycle. Instead, the ECB is likely to place greater emphasis on the duration of the current interest rates, rather than anticipating further rate adjustments in the future.

President Lagarde also suggested that the transmission of monetary policy is now more direct and faster in terms of its impact on financial conditions compared to previous economic cycles.

Additionally, investors vied for bullish positions on the Euro (EUR) following an internal leak from the ECB earlier this week, indicating that the central bank was considering an upward revision to its inflation projections. However, these revised inflation expectations did not lead to any immediate adjustments in the interest rate cycle.

On the other side, the risk appetite for the British Pound (GBP) remains uncertain in the aftermath of Wednesday's underwhelming performance in the United Kingdom's (UK) economic calendar.

The UK Gross Domestic Product (GDP) report showed a more significant decline than initially expected. The figures for July fell by 0.5%, exceeding the anticipated 0.2% decrease and wiping out the 0.5% gain from the previous month. This unanticipated contraction in GDP has contributed to heightened volatility and increased market uncertainty surrounding the British Pound (GBP).

The UK economy is contending with a variety of difficulties arising from the Bank of England's (BoE) stringent stance on interest rates. These challenges encompass exceptionally strong wage growth and a labor market where demand is exhibiting signs of deceleration.

As a result, the outlook for the British economy has become increasingly uncertain, with overall output shrinking in the face of a diminishing demand overview. The likelihood of the UK economy entering a technical recession is heightened, especially in light of the Bank of England's intentions to implement further interest rate hikes that are already in the pipeline.

Market participants will likely observe the EcoFin Meeting from the Eurozone on Friday, seeking further indications on coordinated economic measures. On the UK’s side, Consumer Inflation Expectations will be eyed.