Euro supported by hawkish ECB rhetoric as British Pound struggles after weak GDP

EUR/GBP holds firm on Friday, with the Euro (EUR) modestly outperforming the British Pound (GBP) as weak UK Gross Domestic Product (GDP) data reinforced signs of a slowing economy. At the time of writing, the cross trades around 0.8633, up from an intraday low of 0.8625.

Data released by the UK's Office for National Statistics showed the economy contracted by 0.1% MoM in April, matching market expectations but reversing the 0.3% expansion recorded in March.

The slowdown in economic activity complicates the outlook for the Bank of England (BoE), which is already grappling with elevated inflationary pressures that call for a restrictive policy stance.

The BoE's quarterly survey showed the public's median forecast for inflation over the next year increased to 4.0% from 3.2% in February.

Markets are fully pricing in a hold at next week's monetary policy meeting. According to a Reuters poll conducted between June 5 and 12, economists expect the Bank Rate to stay unchanged through the end of the year. Still, nearly 40% of respondents forecast at least one rate hike, while only six expected a 25-basis-point (bps) cut by year-end.

Meanwhile, the European Central Bank (ECB) raised interest rates by 25 basis points on Thursday and revised its inflation forecasts upward while trimming its growth outlook.

ECB policymaker Peter Kazimir said on Friday that "the rate-hike mission is not yet complete" and warned that "second-round effects are lurking and will materialize." He also said the June inflation data "might be decisive" for the July policy decision.

Nomura's Global FX Strategy team said a "more hawkish ECB path versus the Bank of England" should support the Euro against the Pound. They maintain a long EUR/GBP position and see "narrowing front-end rate differentials" and UK political-fiscal risks as catalysts for a move toward 0.90 in the coming months.