EUR/GBP climbs as Bailey hints at BoE rate cuts amid economic slack

• The Euro appreciates against the Pound, with EUR/GBP holding near the 0.8700 mark.
• BoE Governor Bailey signals rate cuts remain likely, citing economic "slack" and labour market softness.
• Markets now price in a 90% chance of an August BoE cut, with 75 bps of easing expected over the next year.

The Euro (EUR) appreciates against the British Pound (GBP) on Monday, as soft UK economic data and dovish comments from the Bank of England (BoE) weigh heavily on Sterling. Meanwhile, the Euro remains steady despite simmering trade tensions between the European Union (EU) and the United States (US).

The EUR/GBP cross opened the week with a steady upward bias, buoyed by renewed weakness in the Pound. At the time of writing, the pair is trading around 0.8710 during the early American trading hours, holding near a two-week high.

The unexpected decline in UK Gross Domestic Product (GDP) for May, released on Friday, has intensified concerns about the country's economic momentum. According to the Office for National Statistics (ONS), the economy shrank by 0.1% in May, following a sharper 0.3% contraction in April. The downturn was driven by weakness across key sectors, including manufacturing, industrial production, and construction, while only the services sector showed modest growth.

Adding to the bearish pressure on the Pound, Bank of England Governor Andrew Bailey reiterated on Monday that interest rates are on a downward path. In an interview with The Times, Bailey said that economic "slack" is starting to emerge, particularly in response to higher employer national insurance contributions, which he expects will ease inflation pressures. He stated, "I really do believe the path is downward," while noting that the pace of rate cuts would remain "gradual and careful." However, Bailey also warned that if slack opens up more quickly than anticipated, the central bank could respond with more decisive action.

Bailey's remarks align with a growing body of evidence suggesting that the UK labour market is starting to lose steam. A recent KPMG-REC survey showed that staff availability rose at the fastest pace since late 2020 in June, reflecting a sharp slowdown in hiring demand. Permanent job vacancies fell at the steepest rate in two years, while official data showed that unemployment edged up to 4.6% in the three months to April -- a four-year high.

The combination of weak UK economic data, a slowing labor market, and increasing fiscal pressures is strengthening the case for a more aggressive easing cycle by the BoE. Market participants are now assigning a roughly 90% chance of an interest rate cut at the BoE's August meeting, with expectations rising for three cuts over the next year, totaling 75 basis points. Meanwhile, the ECB appears to be nearing the end of its easing cycle as officials become more cautious amid lingering inflation concerns. This differing policy outlook could continue to support the Euro against the Pound.

Looking ahead, all eyes turn to the upcoming inflation releases, with the UK Consumer Price Index (CPI) due Tuesday and the Eurozone CPI on Thursday. A softer UK print could cement expectations for an August rate cut by the BoE, while steady Eurozone inflation may reinforce the ECB's cautious stance. This could keep EUR/GBP biased to the upside in the near term.