• EUR/GBP trades lower on Friday as Eurozone growth concerns weigh on the Euro.
• ECB faces a tougher policy trade-off as stagflation risks build.
• Markets are fully pricing in a 25 bps ECB rate hike at the June 11 policy meeting.

The Euro (EUR) slips against the British Pound (GBP) on Friday after a downward revision to Eurozone growth figures cast fresh doubt over the region's economic outlook. EUR/GBP trades around 0.8642 at the time of writing, pulling back after two days of gains.

Gross Domestic Product (GDP) fell 0.2% from the previous quarter, reversing the earlier estimate of 0.1% growth. The annual growth rate was revised down to 0.3% from 0.8%, slowing from 1.2% in the final quarter of 2025.

The weaker growth figures come as the Eurozone continues to grapple with higher energy costs following months of disruption to shipping through the Strait of Hormuz.

As a major importer of energy, the bloc has been particularly exposed to the surge in Oil prices triggered by tensions in the Middle East. Inflation has already accelerated above the European Central Bank’s (ECB) 2% target, and the latest GDP figures suggest the economic fallout is now becoming visible in growth data as well, raising the risk of stagflation.

That leaves the ECB facing a difficult balancing act. Markets are fully pricing in a rate increase at next week's policy meeting and expect at least two additional rate hikes before the end of the year.

However, signs of slowing growth alongside rising inflation are likely to complicate the policy outlook and could make it harder for the central bank to pursue an aggressive tightening cycle.

"A 25bp risk-dependent, pre-emptive, insurance hike is widely expected from the ECB next week despite rising concerns over the near-term growth outlook. The experience from the 2021-22 supply shock clearly runs deep as a faster response this time is preferred despite a lack of key wage data," Societe Generale economist Anatoli Annenkov said.

"While there is room for modest rate hikes without entering restrictive territory, the ECB is likely to insist on data-dependency going forward. It should also be open about the trade-offs of early action, especially as a strong adverse growth impact could hold back the wage reaction and even call for a policy reversal," he added.