EUR/GBP dips as traders reposition ahead of BoE interest rate decision

• EUR/GBP attracts sellers on Monday with the cross hovering just above the 0.8700 psychological mark, down over 0.20% intraday.
• Traders reposition ahead of the Bank of England's monetary policy decision due Thursday, August 7.
• The United Kingdom's economic outlook is pressured by tax hikes, slowing consumer demand, and a softening labor market.

The Euro (EUR) edges lower against the British Pound (GBP) on Monday, with the Pound trading on a firmer footing across the board, as traders reposition ahead of the Bank of England's (BoE) monetary policy decision due Thursday, August 7.

The EUR/GBP cross marked an intraday high of 0.8731 during the early Asian session but has since drifted lower. At the time of writing, EUR/GBP is hovering around 0.8707 during American trading hours, down over 0.20% on the day, as it pauses a sharp rebound from near a three-week low and snaps a two-day winning streak. However, the downside appears limited, with growing expectations of a dovish BoE interest rate cut on Thursday cushioning further losses.

The BoE's Monetary Policy Committee (MPC) is widely expected to deliver a 25 basis point rate cut on Thursday, lowering the benchmark rate to 4.00%. This would mark the fifth consecutive reduction since August 2024, as the UK economy struggles under the weight of tax increases and cautious consumer spending. While headline inflation eased to 3.6% in June, it remains well above the 2% target, and persistent services inflation continues to worry policymakers. Meanwhile, the labour market is showing clear signs of cooling, with rising unemployment, slowing wage growth, and a marked decline in hiring momentum all adding pressure on the BoE to stay on its easing path.

Employers have cut demand for workers after being hit by measures in the Labour government's first budget, which included a £26 billion ($34.5 billion) increase in payroll taxes and a sharp increase in the minimum wage.

Despite expectations of a rate cut, the decision is likely to reveal a split within the MPC. Some members may push for a deeper 50 bps reduction, while others could advocate for a pause, citing inflation persistence. BoE Governor Andrew Bailey has emphasized a "gradual and cautious" approach to policy easing, stating that the recent jump in price pressures will be temporary.

On the Euro front, sentiment remains fragile following the announcement of a trade framework between the United States and the European Union (EU), which has drawn sharp criticism from several European leaders. The deal is being widely perceived as one-sided and heavily skewed in favor of the United States, sparking concerns over its long-term implications for the Eurozone's competitiveness.

On the data front, preliminary figures for the Eurozone's Harmonized Index of Consumer Prices (HICP) showed inflation holding steady at 2.0% YoY in July. Core inflation also remained subdued, with services inflation easing and food prices inching higher. The European Central Bank (ECB) held interest rates steady at its July meeting, citing the impact of persistent trade uncertainty and external headwinds on the Eurozone economy. The ECB also signaled earlier that its policy easing cycle may be nearing an end as inflation moderates. In contrast, the BoE is expected to continue cutting rates as UK inflation remains elevated and economic activity shows signs of cooling.

This growing divergence in policy outlooks between the ECB and BoE may help limit further downside in the EUR/GBP cross, or even offer modest support in the near term.