EUR/GBP advances near 0.8450, upside looks limited due to dovish ECB

• EUR/GBP gains ground despite dovish sentiment around the ECB on its September decision.
• The ECB’s François Villeroy de Galhau agrees that the central bank should consider cutting interest rates at its next meeting.
• BRC Like-for-Like retail sales rose 0.8% year-on-year in August, up from a 0.3% increase previously.

EUR/GBP is extending its gains for a second straight day, trading around 0.8430 during the European session on Tuesday. However, upside potential for EUR/GBP may be limited as the euro is under pressure amid strong speculation that the European Central Bank (ECB) will cut interest rates in September.

This would mark the ECB’s second interest rate cut since it began moving toward policy normalization in June. Policymakers remain confident that inflation will gradually return to the bank’s 2% target by 2025.

François Villeroy de Galhau, a member of the ECB’s Governing Council, said on Friday, according to Bloomberg, that there are “good reasons” for the central bank to consider cutting key interest rates in September. Villeroy de Galhau suggested that action should be taken at the next meeting on September 12, noting that it would be both fair and prudent to decide on a further rate cut.

In the United Kingdom (UK), BRC Like-for-Like retail sales rose 0.8% year-on-year in August, up from a 0.3% increase in July, marking the fastest growth since the last five months. On Monday, the S&P Global UK Manufacturing PMI was steady at 52.5 for August, in line with preliminary estimates.

The EUR/GBP cross could struggle as traders anticipate no rate cut by the Bank of England (BoE) at its September meeting, while the possibility of a 25 basis point (bps) rate cut at its meeting in November is 87.2%.

Traders await BoE Deputy Governor Sarah Breeden’s role as moderator for a panel on supervisory cooperation at a joint conference hosted by the European Central Bank and the European Banking Authority on Tuesday.