EUR/GBP softens below 0.8650 on concerns over the French political crisis

• EUR/GBP weakens to around 0.8620 in Thursday's early European session.
• Opposition parties said they will vote PM Bayrou out, raising fears of a French political crisis.
• BoE's Mann said a more persistent hold on the bank rate is appropriate right now.

The EUR/GBP cross edges lower to near 0.8620 during the early European session. Fears of a French political crisis exert some selling pressure on the Euro (EUR) against the Pound Sterling (GBP). The release of Retail Sales and inflation reports from Germany will be closely watched later on Friday. 

Business groups said on Wednesday that the French Prime Minister's plan to schedule a confidence vote next month poses significant risks to the economy, raising concerns about a potential recession. Reuters reported that opposition parties want to bring down the minority government in the September 8 vote, which was suddenly announced by Prime Minister Francois Bayrou on Monday, causing the eurozone's second-largest economy to face another crisis. Political uncertainty in France could undermine the shared currency in the near term. 

Traders reduce odds of additional Bank of England (BoE) rate cuts amid persistent inflationary pressures, which might underpin the GBP and create a headwind for the cross. BoE Monetary Policy Committee (MPC) member Catherine Mann, the most hawkish voice, said on Tuesday that she saw a strong case to keep the interest rate on hold for a prolonged period, underscoring concerns at the UK central bank about persistent inflation.

Traders will take more cues from the preliminary reading of the German Consumer Price Index (CPI) on Friday. The CPI is expected to show a rise of 2.1% YoY in August, while the Harmonized Index of Consumer Prices (HICP) is projected to show an increase of 2.0% YoY during the same report period. In case of a hotter-than-expected inflation outcome, this could boost the Euro against the GBP.