EUR/GBP holds losses near 0.8450 due to cautious tone surrounding the BoE policy outlook

• EUR/GBP dips amid rising confidence that the BoE will maintain higher interest rates for an extended period.
• BoE policymakers signaled that the process of easing monetary policy restrictiveness would be gradual.
• The Franziska Brantner-led German Green Party may support the approval of a defense spending deal.

EUR/GBP halts its seven-day winning streak, trading around 0.8430 during the European hours on Wednesday. The currency cross weakens as the Pound Sterling (GBP) strengthens, driven by growing trader confidence that the Bank of England (BoE) will keep interest rates higher for longer.

Market expectations for a prolonged restrictive monetary policy stance by the BoE are supported by strong wage growth in the United Kingdom (UK), which continues to fuel inflation in the services sector. Last week, four BoE policymakers, including Governor Andrew Bailey, told the Parliamentary Treasury Committee that unwinding monetary policy restrictiveness would be gradual, as inflation persistence is unlikely to subside on its own.

However, the EUR/GBP cross appreciated as the Euro (EUR) outperforms its peers, buoyed by optimism that the Franziska Brantner-led German Green Party will support the approval of a defense spending deal set for discussion on Thursday. Earlier, German leaders agreed to ease the borrowing cap, known as the “debt brake,” and establish a €500 billion infrastructure fund to bolster defense spending and stimulate economic growth.

Germany’s fiscal plans have also led traders to reconsider expectations for the European Central Bank (ECB) to implement two additional rate cuts by the summer. ECB policymaker and Bank of Finland Governor Olli Rehn noted that forecasts and core inflation indicators suggest inflation is on track to align with the 2% target.