Euro holds gains against British Pound as UK GDP slows in Q2

The EUR/GBP exchange rate is holding steady near 0.8540 at the onset of European trading on Thursday, with the British Pound (GBP) exhibiting relative weakness against the Euro (EUR). This shift in currency strength follows the release of UK economic data, particularly the preliminary Eurozone Gross Domestic Product (GDP) figure anticipated to be released later on Friday.

The Office for National Statistics in the UK published data on Thursday indicating that the UK economy grew by 0.4% quarter-over-quarter (QoQ) in the second quarter (Q2) of 2026, matching market expectations following a 0.6% growth in Q1. On an annual basis, the UK GDP expanded 1.2% year-over-year (YoY) in Q2 2026, outpacing the 1.1% growth forecast.

Although the monthly UK GDP increased by 0.3% in June, up from 0% in May (the latter figure had been revised from 0.1%), the mixed GDP growth is having minimal impact on the GBP against the EUR. The European Central Bank (ECB) is poised to raise interest rates by 25 basis points (bps) during its upcoming September monetary policy meeting.

ECB President Christine Lagarde had earlier cautioned that renewed Middle East tensions and the subsequent surge in oil prices could pose upside risks to the Eurozone inflation outlook. Economists at Deutsche Bank remain cautious, noting that the recent UK economic strength may not persist throughout the year, citing a pattern of strong first-half growth followed by a weaker second-half trend.

They point to the impending energy crisis as a likely headwind for activity in Q3-2026, driven by rising utility costs. GDP measures the growth rate of a country's economy over a specific period, typically a quarter. The most accurate figures compare GDP to the previous quarter or the same period in the previous year. While a higher GDP generally signals a positive impact on a nation's currency, as it suggests a growing economy capable of exporting goods and services, a declining GDP tends to have a negative effect.

Inflation tends to rise when GDP is growing, prompting central banks to increase interest rates to curb inflation. Higher interest rates can attract foreign investment, bolstering the local currency. Conversely, when GDP is falling, the currency usually suffers. Gold often experiences a bearish trend when GDP growth is robust, as higher interest rates increase the opportunity cost of holding gold versus investing in cash deposits.