EUR/GBP drifts lower below 0.8500 ahead of BoE’s Bailey speech

• EUR/GBP trades in negative territory near 0.8485 in Friday’s early European session. 
• The preliminary UK August PMI data was better than expected, pushing back the expectation of a BoE rate cut.
• Investors expect two more rate cuts from the European Central Bank (ECB) this year. 

The EUR/GBP cross extends its decline near 0.8485 during the early European trading hours on Friday. The lower bets that the Bank of England (BoE) will cut the interest rate in September after the upbeat Purchasing Managers' Index (PMI) reports provide some support to the Pound Sterling (GBP) and drag the cross lower. Later on Friday, the BoE Governor Andrew Bailey’s speech will be closely watched. 

Business activity in the UK showed its strongest growth in four months alongside cooling price pressures, according to a survey on Thursday. S&P Global’s Composite Purchasing Managers’ Index (PMI) rose to 53.4 in August from 52.8 in the previous month. The figure was slightly higher than the expectation of 52.9. This encouraging report scaled back investors’ bets on a BoE interest rate cut next month, which has boosted the GBP against the Euro (EUR). Financial markets are now pricing in less than 30% possibility of a BoE September rate cut after Thursday's PMI data.

On the Euro front, the European Central Bank (ECB) maintained interest rates unchanged at its July meeting, hinting at the likelihood of rate reduction later this year, according to minutes from its recent meeting released on Thursday. Investors have priced in around a 90% odds of 25 basis points (bps) cut in the deposit rate to 3.5% in September and see at least one more move before the end of the year. This, in turn, weighs on the shared currency. 

The ECB Governing Council member Martins Kazaks said that he’s ready to discuss another interest rate cut at the September meeting, voicing confidence in inflation returning to 2% as well as worries over the economy.