EUR/GBP extends losses below 0.8500 as German GDP comes in line with expectations

• EUR/GBP is trading in negative territory for a fifth consecutive day around 0.8460 in the first European session on Tuesday.
• Germany’s economy contracted by 0.1% QoQ in Q2, compared to the previous reading of -0.1%, in line with the estimate.
• The BoE’s Bailey said it was “cautiously optimistic” about inflation but it was too early to declare victory on inflation.

The EUR/GBP cross is extending its downside near 0.8460 in early European trading hours on Tuesday. The euro weakens as the prospect of sluggish growth in the eurozone sparked bets on more interest rate cuts from the European Central Bank (ECB) in September. Attention will turn to the first reading of German and eurozone inflation data for August, due later this week.

Data released by Germany’s Federal Statistical Office showed on Tuesday that German Gross Domestic Product (GDP) for the second quarter (Q2) was in line with expectations. The economy contracted by 0.1% QoQ in Q2, compared to the previous reading of -0.1%. On an annual basis, GDP was unchanged from the same quarter in 2023. The Euro remains under selling pressure in an immediate reaction to the German GDP report.

Olli Rehn, a member of the ECB’s Governing Council, noted last week that slowing inflation and a weak eurozone economy supported the case for reducing borrowing costs next month. Traders expect the ECB to cut its benchmark interest rates by 25 basis points (bps) at its September meeting, which could continue to weigh on the single currency in the near term.

Bank of England (BoE) Governor Andrew Bailey said on Friday he was “cautiously optimistic” about inflation, but it was premature to declare victory over inflation. Expectations that the UK central bank’s policy easing cycle will be slower than that of other major central banks provide some support for the British pound (GBP) and act as a headwind for EUR/GBP.