EUR/GBP holds key support at 0.8500 with focus on ECB policy decision

• EUR/GBP holds 0.8500 support firmly ahead of ECB policy meeting.
• Investors will focus on the ECB's rate cut path beyond June.
• Persistent wage growth in the UK remains a barrier to the BoE pivoting towards policy normalization.

The EUR/GBP pair remains contained above the psychological support of 0.8500 in the American session on Tuesday. The cross remains on the sidelines as investors await the European Central Bank's (ECB) interest rate decision, which will be announced on Thursday.

The ECB is widely anticipated to deliver a 25 basis point (bps) rate cut at its June meeting. Therefore, investors will focus on the rate cut trajectory for the full year. ECB officials have been comfortable with market speculation about a rate cut in June, but are reluctant to offer a specific rate cut path due to the ECB's annual Harmonized Index of Consumer Prices (HICP) data. Eurozone for May, which were higher than expected.

The HICP report showed that headline and underlying figures exceeded estimates due to persistently high services inflation. Core inflation of 4.1% was the highest in seven months. ECB officials have advised remaining reliant on the data and have kept hopes of subsequent rate cuts off the table.

Meanwhile, better-than-projected first-quarter Eurozone gross domestic product (GDP) data has also delayed speculation about ECB rate cuts in July. The Eurozone economy expanded at a higher pace of 0.3% versus estimates of 0.2%.

In the UK region, investors remain uncertain about the timing of the Bank of England's (BoE) rate cut as higher wage growth continues to keep risks of persistent price pressures elevated. Financial markets currently expect the BoE to begin cutting interest rates at its August meeting.