EUR/GBP steadies after BoE's hawkish rate cut, divergence with ECB in focus

• EUR/GBP rebounds from a one-week low of 0.8653, trading around 0.8670 on Friday.
• The BoE cut rates by 25 bps to 4.00% on Thursday in a tight 5-4 vote, signaling a cautious easing path.
• Chief Economist Huw Pill, who dissented, warned that the current pace of cuts may not be sustainable due to rising inflation risks.

The EUR/GBP cross is showing signs of stabilization on Friday, following a slide to a one‑week low of 0.8653 earlier in the day. At the time of writing, the cross is hovering around 0.8672 during American trading hours, as traders digest the aftermath of Thursday's Bank of England (BoE) monetary policy decision. Despite the modest rebound, EUR/GBP remains on track for its second consecutive weekly decline, pressured by diverging policy signals between the BoE and the European Central Bank (ECB).

The Pound surged across the board after the BoE delivered a hawkish 25 basis point rate cut on Thursday, bringing the bank rate down to 4.00% its lowest level since March 2023. While the cut was widely expected, the narrow 5-4 vote split and the central bank's cautious forward guidance suggested that policymakers are not in a hurry to ease further.

Earlier on Friday, BoE Chief Economist Huw Pill -- who opposed the BoE's closely contested decision on Thursday to cut interest rates by 25 basis points -- struck a cautious tone on the outlook for further easing. He warned that the pace of recent rate cuts may not be sustainable and the central bank may need to slow its once-a-quarter pace of interest-rate cuts after a resurgence in inflation that risks changing the behavior of households and businesses. While acknowledging that disinflation is progressing and the labor market is weakening, Pill flagged lingering risks that could complicate the central bank's path forward. He also noted that inflation is still being driven by one-off external shocks, but warned of spillover effects into more persistent domestic inflation, particularly if price and wage-setting behaviours continue to shift.

Pill added that inflation risks over the next two to three years have marginally tilted higher, and emphasized that the UK economy is still operating under restrictive policy. He reaffirmed that the Monetary Policy Committee (MPC) believes rates are approaching the 2% to 4% neutral range, and that the decision to cut rates this week was "clear," though the scope for further cuts is constrained by weak supply growth.

Governor Andrew Bailey also said following the monetary policy decision, there is "genuine uncertainty now about the course of that direction of rates."

Looking ahead, the monetary policy paths of the Bank of England (BoE) and the European Central Bank (ECB) are currently diverging, a development that is increasingly influencing the EUR/GBP outlook. The BoE is in the midst of a cautious rate-cutting cycle, while the ECB left its key rates unchanged at its last meeting. The ECB's decision reflects greater confidence that inflation is stabilizing near the 2% target, though policymakers remain wary of external headwinds.

The Governing Council has reiterated its "meeting-by-meeting and data-dependent" stance, choosing to pause and assess the impact of global trade uncertainty and US tariffs on the eurozone economy. While some analysts, including Deutsche Bank, suggest that the ECB's easing cycle may already be complete.