- EUR/GBP struggled to capitalize on its early modest gains to the highest level since early June.
- Brexit woes/COVID-19 jitters continued undermining the sterling and extended some support.
- A stronger USD kept the euro bulls on the defensive and capped gains, at least for the time being.
The EUR/GBP cross quickly retreated nearly 20 pips from the highest level since early June in the last hour and was last seen trading in the neutral territory, around the 0.8625-30 region.
The cross built on its recent strong bounce from the vicinity of the key 0.8500 psychological mark and gained some follow-through traction through the first half of the trading action on Tuesday. This marked the fourth day of a positive move in the previous five sessions and was sponsored by the British pound's relative underperformance.
Reports over the weekend suggested that the UK will threaten this week to deviate from the Northern Ireland Protocol of the Brexit deal. Sources indicated that David Frost – the UK minister who leads Brexit negotiations – is preparing to announce a significant change on the protocol that could have far-reaching consequences for the relationship with the EU.
This, along with concerns about the spread of the highly contagious Delta variant of the coronavirus, overshadowed the UK's decision to lift COVID-19 restrictions on July 19. In the latest development, the UK Health Minister Sajid Javid tested positive for COVID-19 and forced Prime Minister Boris Johnson and Finance Minister Rishi Sunak into quarantine.
The combination of factors acted as a headwind for the sterling, which turned out to be a key factor that continued pushing the EUR/GBP cross higher on Tuesday. That said, bulls struggled to capitalize on the momentum and faced rejection just ahead of mid-0.8600s, which should now act as a key pivotal point and help determine the next leg of a directional move.
The prevalent strong bullish sentiment surrounding the US dollar kept the euro bulls on the defensive. This, in turn, kept a lid on any strong gains for the EUR/GBP cross, at least for the time being. In the absence of any major market-moving economic releases, it will be prudent to wait for some follow-through buying beyond the mentioned hurdle before placing fresh bullish bets.
Technical levels to watch
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