EUR/GBP holds losses below 0.8350, downside seems restrained due to dovish BoE

• EUR/GBP depreciates due to the increased likelihood of further ECB rate cuts.
• ECB’s Villeroy described Trump's tariffs as a "very worrying development."
• Traders expect the BoE to deliver a 25 basis point rate cut on Thursday.

EUR/GBP trades around 0.8330 during the European session on Monday after recovering some part of its daily losses. However, the EUR/GBP cross faces challenges as the Euro remains under pressure due to increasing expectations of further interest rate cuts by the European Central Bank (ECB). The January’s Harmonized Index of Consumer Prices for the European Monetary Union will be eyed later in the day.

Last week, the ECB cut its Deposit Facility Rate by 25 basis points (bps) to 2.75%, while the Main Refinancing Operations Rate dropped to 2.9%, as anticipated. Markets had already factored in the rate cut, expecting inflation in the Eurozone to remain on track toward the ECB's 2% target.

On Monday, ECB policymaker Francois Villeroy de Galhau stated that US President Donald Trump's tariffs will heighten economic uncertainty, describing it as a "very worrying development." He added that there will likely be further rate cuts, according to Reuters.

On Saturday, the US informed that it would impose 25% tariffs on Canadian and Mexican goods, while Chinese exports would face a 10% tariff. These tariffs are set to take effect on Tuesday and will remain in place until the fentanyl overdose crisis is "sorted."

The downside of the EUR/GBP pair might be limited as the Pound Sterling (GBP) faces risks due to expectations that the Bank of England (BoE) will restart its policy-easing cycle, likely cutting interest rates by 25 basis points (bps) to 4.5% in February.

Investors are closely monitoring the BoE’s monetary policy decision next Thursday, with expectations of a dovish stance given recent signs of slowing inflation, despite continued wage growth acceleration. The BoE’s monetary policy guidance could be dovish as recent inflation indicators show signs of deceleration, although wage growth remains on the rise. Financial market participants anticipate three interest rate cuts from the BoE this year amid declining labor demand and weakening business confidence.