Euro retreats from weekly highs against British Pound as UK data beats expectations

• EUR/GBP eases below 0.8590 from session highs just below the 0.8600 line.
• Strong UK GDP and Industrial Production data have provided a fresh boost to the Pound.
• The euro appreciated moderately on Thursday following the ECB's interest rate hike.

UK data released on Friday showed that Gross Domestic Product (GDP) rose 0.4% in July, above expectations of a flat reading and following a 0.3% rise in June. These figures reflect a 0.2% increase in Industrial Production, reversing June's 0.2% decline, and a 0.9% jump in Manufacturing Production, its strongest growth in the last four months, beating expectations of a more moderate 0.2% advance after June's 0.5% decline.

In addition, the UK Index of Services, which measures output volume and value-added growth in the UK services industry, rose 0.6% in the three months to July, above the 0.5% expected, while the Goods Trade Balance deficit narrowed to GBP 20.96 billion, from GBP 23.00 billion in June, also beating expectations of a GBP 22.3 billion shortfall.

ECB hikes rates and hints at further tightening

In the Eurozone, the European Central Bank (ECB) met markets’ expectations on Thursday and raised its benchmark Rate on the Deposit Facility by 25 basis points to 2.5% for the second consecutive time, amid rising consumer price pressures stemming from higher energy prices.

Beyond that, President Christine Lagarde warned the energy shock triggered by the Middle East conflict is expected to extend “well into 2027”, and that consumer inflation will only return to the 2% level by the end of next year. These comments suggest that the central bank will be forced to hike rates at least once more in the next 12 months, which provided some support for the Ruro.

The Bank of England (BoE), on the other hand, will, highly likely, stand pat on rates after next week¡s monetary policy meeting. Analysts at Rabobank highlight that “although the voting pattern of the July 30 policy meeting was more hawkish than expected,” there remains “a high bar for the doves on the committee to vote for a tightening in policy.” This suggests that, despite the more assertive stance of a minority on the committee, Rabobank still sees the core majority as reluctant to endorse near-term rate hikes.