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

• EUR/GBP holds the 0.8500 support tightly ahead of the ECB policy meeting.
• Investors will keenly focus on the ECB’s rate-cut path beyond June.
• UK’s persistent wage growth remains a barrier for the BoE pivoting to policy normalization.

The EUR/GBP pair remains subdued above the psychological support of 0.8500 in Tuesday’s American session. The cross stays 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 rate-cut move of 25 basis points (bps) in its June meeting. Therefore, investors will keenly focus on the rate-cut path for the entire year. ECB officials have remained comfortable with market speculation for a rate cut in June but are reluctant to offer any specific rate-cut path due to higher-than-expected Eurozone annual Harmonized Index of Consumer Prices (HICP) data for May.

The HICP report showed that headline and core HICP figures beat estimates due to stubbornly higher service inflation. The underlying inflation at 4.1% was the highest in seven months. ECB officials have advised to remain data-dependent and have kept hopes of subsequent rate cuts off the table.

Meanwhile, better-than-projected Eurozone Q1 Gross Domestic Product (GDP) data has also pushed back speculation for ECB rate cuts in July. The Eurozone economy expanded at a higher pace of 0.3% from the estimates of 0.2%.

In the United Kingdom (UK) region, investors remain uncertain over Bank of England (BoE) rate-cut timing as higher wage growth continues to keep risks of persistent price pressures elevated. Currently, financial markets expect that the BoE will start reducing interest rates in the August meeting.