EUR/GBP retreats as BoE stays cautious, ECB easing widens policy gap

• EUR/GBP pulls back from Wednesday's multi-week peak after BoE rate decision.
• Bank of England keeps rates unchanged at 4.25% amid stubborn inflation.
• UK inflation is expected to hover near 3.4% before easing toward 2% in 2026.
• PPolicy divergence between ECB and BoE weighs on the Euro.

The Euro (EUR) edges lower against the British Pound (GBP) on Thursday, snapping its recent winning streak after the Bank of England (BoE) held its key interest rate steady at 4.25% in its June policy meeting. The central bank's decision, delivered against a backdrop of sticky inflation and global uncertainty, provided fresh support for the Sterling.

The EUR/GBP cross slips about 0.11% on the day, easing back from Wednesday's multi-week high of 0.8456 to trade around 0.8540 during the American session. The Pound remains underpinned as traders digest the BoE's cautious guidance on the outlook for rates and inflation.

The BoE voted 6-3 to hold the Bank Rate steady at 4.25%, with three members pushing for a 25-basis-point cut to 4.00% -- a more dovish tilt than many investors had anticipated. This split highlights growing concern within the Monetary Policy Committee about signs of cooling in the UK labour market and slower wage growth, even as headline inflation remains above target. The Central bank stressed that policy decisions will continue to be guided by incoming data rather than a preset path, balancing the need to support growth while guarding against persistent inflation.

Governor Andrew Bailey acknowledged that although inflation has eased from previous highs, the outlook remains fragile due to lingering global supply risks and elevated energy prices. He cautioned that energy costs have risen again amid the deepening Middle East conflict, and stressed that the committee will remain vigilant about how this could affect the UK economy. Policymakers reiterated the "two-sided risks to inflation," noting that the headline CPI rose to 3.4% in May from an adjusted 2.6% in March. The Bank projects inflation will hold near current levels for the rest of this year before gradually returning toward the 2% target in 2026, reinforcing the view that clearer signs of sustained disinflation are needed before rate cuts are back on the table.

The policy divergence between the Bank of England and the European Central Bank (ECB) remains a key driver for the EUR/GBP direction. While the BoE has chosen to keep rates steady at 4.25% and wait for clearer signs that inflation will return sustainably to target, the ECB has already moved to ease further. On June 5, the ECB cut its key rates by 25 basis points, lowering the deposit facility rate to 2.00%, amid evidence of disinflation across the currency bloc. This has reinforced market bets for at least one more cut before year-end. ECB policymaker Joachim Nagel emphasized the need for policy flexibility, citing persistent global uncertainties that could cloud the path for inflation. This contrast in policy paths favours the Pound over the Euro, keeping the EUR/GBP cross under mild pressure in the near term.