EUR/GBP inches lower, tests 200-day EMA as UK GDP tops forecasts

• EUR/GBP trades near 0.8420, testing 200-day EMA after failing to extend previous day's gains.
• Eurozone GDP revised down modestly, but Industrial Production surprises to the upside.
• UK Q1 GDP expands at the strongest pace in three quarters.

EUR/GBP is trading slightly lower near 0.8420 at the time of writing on Thursday, retreating from the previous day's highs as the pair tests the 200-day Exponential Moving Average (EMA). The British Pound found renewed support after stronger-than-expected UK Gross Domestic Product (GDP) data, while the Euro remains underpinned by upbeat Industrial Production figures.

In the Eurozone, GDP was revised down to 0.3% QoQ for Q1 from an initial 0.4% estimate. Annual growth held at 1.2%, matching the previous quarter and preliminary figures. However, Industrial Production in March rose by a robust 2.6% MoM -- beating expectations of 1.8% -- and marking the strongest print since November 2020, driven by higher capital goods output and factory activity.

The British economy grew by 0.7% QoQ in Q1, surpassing market forecasts of 0.6% and accelerating from a 0.1% gain in Q4 of 2024. This marks the strongest quarterly growth in three quarters, reflecting resilience in key sectors. On a monthly basis, GDP rose by 0.2% in March following a 0.5% increase in February. Annual growth came in at 1.3%, slightly below the prior 1.5% but ahead of consensus at 1.2%.

This latest economic data underscores a widening monetary policy divergence between the European Central Bank (ECB) and the Bank of England (BoE). The ECB, at its April 17 meeting, lowered its three key interest rates by 25 basis points, with the deposit facility rate now at 2.25%, signaling a move to ease monetary policy amid concerns about rising trade tensions impacting the growth outlook. The ECB appears on track to begin its rate-cutting cycle, amid subdued inflation and a downward revision to Q1 GDP growth. Although Eurozone Industrial production posted its strongest monthly gain since late 2020, policymakers remain focused on supporting the fragile recovery.

On the other side, the BoE also lowered its policy rate by 25 basis points to 4.25% on May 8, but the decision exposed divisions within the Monetary Policy Committee and reflected a more cautious tone. The UK's economy expanded by 0.7% in Q1 -- the strongest quarterly performance in three quarters -- and monthly figures continue to outperform expectations, giving the BoE more room to hold off on aggressive easing. As a result, monetary policy divergence between the two central banks continues to widen, with the ECB clearly ahead in its easing cycle, while the BoE signals a slower, data-dependent path.