EUR/GBP posts modest losses near 0.8650 ahead of German GDP release

• EUR/GBP weakens to around 0.8650 in Friday's early European session.
• Hotter-than-expected UK July inflation data and upbeat UK PMI diminish odds of BoE rate reductions this year.
• Eurozone and German Composite PMI data came in stronger than expected in August. 

The EUR/GBP cross trades with mild losses near 0.8650 during the early European session on Friday. The expectations that the Bank of England (BoE) might hesitate to cut interest rates in the remainder of the year support the Pound Sterling (GBP) against the Euro (EUR). The release of Germany's Gross Domestic Product (GDP) for the second quarter (Q2) will be published later on Friday.

UK inflation rose again in July to a hotter-than-expected 3.8% amid higher food prices and travel costs, prompting the expectation that the Bank of England (BoE) will delay further interest rate cuts. Furthermore, the upbeat preliminary UK S&P Global Purchasing Managers' Index (PMI) data for August contribute to the GBP's upside. The report showed that the Composite PMI rose at a faster pace to 53.0 in August from the previous reading of 51.5, above the consensus of 51.6.

The BoE cut the interest rates from 4.25% to 4.0% earlier this month as the UK central bank resumed what it describes as a "gradual and careful" approach to monetary easing. A quarter-point cut is not fully priced in until March 2026.

On the Euro front, the HCOB PMI data from Germany and the Eurozone showed economic resilience in August, complicating the European Central Bank's (ECB) plans for further rate cuts this year. Germany's Composite PMI rose to 50.9 in August, driven by improvements in manufacturing output and new orders. This figure registered the highest level since March. 

The Eurozone Composite PMI improved to 51.1 in August versus 50.9 prior. These reports may prompt the ECB to adopt a more cautious stance on further rate cuts. However, analysts believe that the significant impact of trade tensions earlier this year could add another layer of complexity to the ECB's decision-making process and cap the upside for the shared currency.

Traders will take more cues from the Germany's GDP report later on Friday, which is estimated to grow 0.4% YoY in Q2. If the report shows stronger-than-expected outcome, this could help limit the EUR's losses in the near term.