EUR/GBP trades with a mild positive bias above mid-0.8500s, upside seems limited

• EUR/GBP edges higher on the last day of the week, albeit lacks follow-through buying.
• Hawkish ECB minutes on Thursday underpins the Euro and lends support to the cross.
• Expectations for a mor aggressive BoE rate hikes should cap any meaningful upside.

The EUR/GBP cross attracts some buying near the 0.8535 region on Friday, albeit struggles to capitalize on the modest intraday uptick and remains confined in the previous day's broader range. Spot prices, however, manage to hold above the lowest level since August 2022 touched on Thursday and currently trade around the 0.8550-0.8555 zone, up less than 0.10% for the day.

The minutes of the European Central Bank (ECB) June meeting, released on Thursday, showed that the Governing Council is determined to continue the current hiking cycle beyond July to bring inflation back to target. It is worth recalling that the ECB had forecasted that inflation would stay above its 2% target through the end of 2025. This hawkish outlook, to a larger extent, offsets emerging signs of a cooling economy and continues to underpin the shared currency, which, in turn, is seen lending some support to the EUR/GBP cross.

The upside, however, remains capped in the wake of expectations that the Bank of England (BoE) will tighten its monetary policy more aggressively to combat stubbornly high inflation. In fact, the current market pricing indicates that the BoE could raise interest rates from the current 5% to a cycle peak of 6.5% to dampen demand and force inflation lower. The speculations were fueled by stronger UK wage growth data, which, according to BoE Governor Andrew Bailey and UK Finance Minister Jeremy Hunt, is harming the efforts to contain inflation.

This overshadows the possibility of a recession in the UK later this year and is seen acting as a tailwind for the British Pound (GBP), capping the upside for the EUR/GBP cross. Data released on Thursday that the British economy contracted by 0.1% in May compared to April. The reading, however, was less worse than market expectations and should allow the BoE to keep raising interest rats in coming months. Hence, it will be prudent to wait for strong follow-through buying before confirming that the cross has bottomed out and placing fresh bullish bets.

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