EUR/GBP flits with one-week-old trading range support, around 0.8680-75 region

The EUR/GBP cross extended its intraday descent through the mid-European session and was last seen hovering near the lower boundary of a one-week-old trading range, around the 0.8680-75 region.

The cross continued with its struggle to find acceptance above the 0.8700 mark and witnessed some fresh selling on the first day of a new trading week. The British pound's relative outperformance against its European counterpart could be solely attributed to the optimism over a strong economic recovery in the UK, bolstered by the easing of COVID-19 restrictions.

In the latest developments, the UK Prime Minister said this Monday that the government will be able to go ahead with further restriction loosening and dispense with the one metre-plus social distancing rule on June 21. Regarding international travel, Johnson noted that there will be some opening up on May 17 but added that they need to be as cautious as they can.

Despite the supporting factor, investors might be reluctant to place any aggressive bullish bets around the sterling amid the risk posed by the Scottish elections next week. Polls are pointing to pro-independence parties achieving a supermajority in Scotland's parliament, which might intensify pressure on Johnson to allow a second independence referendum.

This, along with a modest pickup in demand for the shared currency, might extend some support to the EUR/GBP cross and help limit the downside, at least for the time being. Expectations that the Fed will keep interest rates low for a longer period prompted some fresh selling around the US dollar, which, in turn, was seen as a key factor that benefitted the euro.

Hence, it will be prudent to wait for some strong follow-through selling before confirming that the recent bounce from over one-year lows has run out of steam. The EUR/GBP cross might then accelerate the slide back towards challenging the 0.8600 round-figure mark. The downside, however, is likely to remain cushioned as investors might prefer to wait on the sidelines ahead of the latest monetary policy update by the Bank of England on Thursday.

Technical levels to watch