EUR/GBP gathers strength above 0.8850 amid UK fiscal worries, weak GDP data

• EUR/GBP gains momentum to near 0.8860 in Friday's early European session. 
• UK PM Starmer and Finance Minister Reeves drop plan to hike income tax rates. 
• The preliminary reading of the Eurozone Q3 GDP report will be in the spotlight later on Friday. 

The EUR/GBP cross attracts some buyers to around 0.8860 during the early European session on Friday. The Pound Sterling (GBP) weakens against the Euro (EUR) amid rising concerns over fiscal discipline and political stability in the United Kingdom (UK).

The downtick of the GBP came after a report by the Financial Times that UK Prime Minister Keir Starmer and Finance Minister Rachel Reeves have dropped the plan to raise income tax rates, in a dramatic turn ahead of the budget on November 26. 

"If it means fiscal tightening won't be as drastic as expected, that might be less bad for the economy, but foreign investors in the gilt market will be further troubled by what it means for the underlying fiscal position, and that will justify the knee-jerk negative reaction to the story," said Ray Attrill, head of FX research at National Australia Bank.

Furthermore, weaker-than-projected UK preliminary Gross Domestic Product (GDP) data has prompted further economic concerns and added to pressure on the Bank of England (BoE) to deliver another rate cut in December. 

Following the release of downbeat UK GDP data, the market has significantly increased its expectations for an interest rate cut by the BoE at its December meeting. Bets for a 0.25 percentage point cut have surged to near 80% probability. This, in turn, exerts some selling pressure on the GBP and acts as a tailwind for the cross. 

Traders will closely monitor the preliminary reading of Eurozone Gross Domestic Product (GDP) for the third quarter (Q3), which will be published later on Friday. The Eurozone economy is projected to grow by 0.2% QoQ in Q3. On an annual basis, the Eurozone GDP is estimated to expand by 1.3% during the same period. If the reports show a worse-than-expected outcome, this might cap the upside for the Euro in the near term.