EUR/GBP recovers close to 0.8650 as UK’s outlook dampens

The EUR/GBP pair trades back-and-forth after a strong recovery to near 0.8650 in the European session. The cross discovered buyers’ interest after the United Kingdom’s Office for National Statistics (ONS) reported that the factory data contracted for the second time in August.

UK’s Manufacturing and Industrial Production dropped by 0.7% and 0.8% on a monthly basis. UK firms have slowed down their manufacturing activities as higher interest rates, supply chain disruptions, strong inflation have dampened the overall demand environment. Also, firms have postponed their plans of increasing their operating capacity due to higher mortgage rates.

While the monthly Gross Domestic Product (GDP) expanded by 0.2% in August as expected, risks of a slowdown in the UK economy remain persistent as deepening Middle East tensions could disrupt the global supply chain and rising oil prices would accelerate inflationary pressures. This would discomfort Bank of England (BoE) policymakers, which are struggling to bring down inflation.

Meanwhile, BoE Governor Andrew Bailey reiterated on Tuesday that policy will remain sufficiently restrictive. The central bank is observing progress in inflation but there is still work left to do.

On the Eurozone front, monthly Industrial Production expanded at a higher pace of 0.6% in August against expectations of 0.1%. In July, the economic data contracted by 1.1%. The annual Industrial Production data contracted by 5.1%. About the inflation outlook, European Central Bank (ECB) policymaker and Bundesbank Chief Joachim Nagel said that inflation is seen declining to 2.5% by 2025.