EUR/GBP remains on the defensive near 0.8550 as UK economic outlook improves

• EUR/GBP remains subdued, slightly below 0.8550, as the UK appears to have emerged from recession.
• BoE's Swati Dhingra highlights the downside risks of keeping rates high.
• The economic outlook for the Eurozone remains weak due to weak economic activity in Germany and France.

The EUR/GBP remains moderate around 0.8550 during the European session on Friday. The pair is under pressure as the outlook for the UK economy improves due to looming hopes that the Bank of England (BoE) will pivot towards cutting interest rates.

On Thursday, S&P Global/CIPS reported that business optimism improved due to strong order books. The agency commented that the economy is expected to grow between 0.2% and 0.3% in the first quarter of 2024, easing fears of a technical recession seen in the second half of 2023. Investors should note that it is considered that The economy is in a technical recession when it records a decline in growth for two consecutive quarters.

Meanwhile, BoE policymakers remain concerned about downside risks to the British economy due to the delay of rate cuts. BoE policymaker Swati Dhingra, who voted for a rate cut at the last policy meeting, said delaying a decision on rate cuts comes at a cost to living standards.

On the Eurozone front, manufacturing activities in the German and French economies remain a cause of major concern, while the rest of the continent shows growth. The worsening of tensions in the Red Sea continues to affect business optimism, leading to demands from the European Central Bank (ECB) for an early rate cut.

However, ECB policymaker and Bundesbank chief Joachim Nagel said on Friday that it is “too early to cut rates, even if it seems tempting to some,” adding that the period of rapid falls of inflation has ended, so setbacks are expected.