EUR/GBP softens below 0.8450 as weaker UK data boost BoE rate cut bets

• EUR/GBP drifts lower to near 0.8440 in Monday's early European session.
• ECB policymakers said the central bank must be prudent with rate cuts given high uncertainty. 
• Softer inflation and slower growth in the UK economy pave the path for BoE rate cuts. 

The EUR/GBP cross trades with mild losses around 0.8440 during the early European session on Monday. The downbeat UK economic data boost the interest rate cut bets from the Bank of England (BoE), weighing on the Pound Sterling (GBP) against the Euro (EUR). Traders will keep an eye on Germany's December Producer Price Index (PPI), which is due later on Monday. On Tuesday, the UK Employment data will be in the spotlight. 

The ECB emphasised gradual and cautious rate cuts amid economic uncertainties. ECB policymaker Joachim Nagel said on Friday that the central bank should not rush to cut the interest rates as inflation remains high and uncertainty great. Meanwhile, ECB Executive Board member Isabel Schnabel noted that the central bank likely has room to continue lowering borrowing costs as inflation converges toward 2% but must proceed carefully. 

The ECB slashed interest rates four times last year, and investors expect another three or four reductions in 2025 as inflation could move closer to its 2% objective in the next months, despite global economic uncertainty.

On the GBP's front, investors bet on more BoE rate cuts in 2025 after the weaker-than-expected UK Retail Sales and Gross Domestic Product (GDP) last week. These disappointing reports add to the dim economic picture in the United Kingdom, which might exert some selling pressure on the GBP and create a tailwind for EUR/GBP. The BoE is widely anticipated to cut the interest rate by 25 bps at its February meeting. Markets priced in a total of more than 75 basis points (bps) worth of interest rate cuts throughout 2025, up from around 65 bps reductions expected before the data.