EUR/GBP recovers strongly from 0.8520 on UK’s dismal outlook

• EUR/GBP rebounds sharply from 0.8520 as BoE could lean towards early rate cuts.
• Fears of a recession in the UK economy have deepened.
• The ECB is expected to start the rate-cut campaign.

The EUR/GBP pair discovers strong buying interest near 0.8520 in the late European session. The asset recovered as investors saw the Bank of England (BoE) reducing interest rates earlier than market participants anticipated.

In the revised estimates, the United Kingdom Office for National Statistics (ONS) reported a contraction in the third quarter of 2023 by 0.1%. The UK economy is underperforming due to labor market and consumer spending, which could lead to a further slowdown in the fourth quarter. The UK economy would be considered in a technical recession if it contracts for the second time in a row.

In the BoE’s monetary policy announced last week, policymakers decided to keep interest rates at 5.25%. When asked about rate cuts, the BoE said they are unlikely until there is evidence that inflation will return sustainably to the 2% target. Swati Dhingra voted for a reduction in interest rates by 25 basis points (bps).

The Pound Sterling faces pressure against the Euro despite the S&P Global reported upbeat Service PMI data for January. The economic data landed at 54.3, which remained better than the expectations, and the former reading of 53.4.

On the Eurozone front, the European Central Bank (ECB) sees interest rates declining from late Summer as current price pressures exceed the central bank's desires. The progress in inflation declining towards 2% is much stronger as producers have significantly reduced prices of goods and services offered at factory gates. In December, the annual Producer Price Index (PPI) deflated at a stronger pace of 10.6% against expectations of 10.5% and the prior figure of 8.8%.