EUR/GBP extends losses below 0.8500 as German GDP comes in line with expectations

• EUR/GBP trades in negative territory for the fifth consecutive day around 0.8460 in Tuesday’s early European session. 
• The German economy contracted 0.1% QoQ in Q2, compared to the previous reading of -0.1%, in line with estimation. 
• BoE’s Bailey said he was “cautiously optimistic” about inflation, but it’s too early to declare victory on inflation.

The EUR/GBP cross extends its downside near 0.8460 during the early European trading hours on Tuesday. The Euro weakens as the sluggish growth outlook in the Eurozone has triggered bets on more rate cuts from the European Central Bank (ECB) in September. The attention will shift to the first reading of German and Eurozone inflation data for August, which are due later this week. 

Data released by the Federal Statistics Office of Germany showed on Tuesday that the German Gross Domestic Product (GDP) for the second quarter (Q2) was in line with expectations. The economy contracted 0.1% QoQ in Q2, compared to the previous reading of -0.1%. On an annual basis, the GDP remained unchanged compared to the same quarter in 2023. The Euro remains under selling pressure in an immediate reaction to the German GDP report. 

ECB Governing Council member Olli Rehn noted last week that the slowdown in inflation and weakness in the Eurozone economy supported the case for lowering borrowing costs next month. Traders expect the ECB to cut its benchmark interest rates by 25 basis points (bps) in the September meeting, which might continue to weigh on the shared currency in the near term. 

The Bank of England (BoE) Governor Andrew Bailey said on Friday that he was “cautiously optimistic” about inflation, but it was premature to declare victory on inflation. The expectation that the UK central bank’s policy-easing cycle will be slower than that of other major central banks provides some support to the Pound Sterling (GBP) and acts as a headwind for EUR/GBP.