- EUR/GBP gains strong positive traction on Friday and jumps to its highest level since February 2021.
- A bleak outlook for the UK economy weighs heavily on the British pound and remains supportive.
- A stronger USD, geopolitical risks, recession fears undermine the euro and cap gains for the cross.
The EUR/GBP cross catches aggressive bids on Friday and rallies to its highest level since February 2021 during the mid-European session. The momentum, however, falters near mid-0.8800s, forcing spot prices to trim a part of strong intraday gains and retreat to the 0.8800 mark.
A 50 bps rate hike by the Bank of England on Thursday disappointed market participants anticipating a more aggressive policy tightening. This comes amid a bleak outlook for the UK economy, which is seen as a key factor behind the British pound's relative underperformance. The already weaker sterling loses additional ground following the release of UK PMI prints, which showed that the downturn in British businesses steepened in September.
Adding to this, a survey from the Confederation of British Industry revealed that the retail balance fell to -20% in September from +37% in August and fueling recession fears. The UK government, meanwhile, unleashed historic tax cuts and huge increases in borrowing in a bid to boost growth. The prospect of more fiscal stimulus threatens to undermine the Bank of England’s goal to tame inflation and exerts additional pressure on the domestic currency.
The shared currency, on the other hand, is weighed down by relentless US dollar buying and the energy crisis in Europe amid the risk of a further escalation in the Russia-Ukraine conflict. Apart from this, the worse-than-expected flash Manufacturing PMI prints from France and Germany - the Eurozone's two largest economies - raise concerns about a deeper economic downturn. This continues to undermine the euro and caps the upside for the EUR/GBP cross.
From a technical perspective, acceptance above the 0.8800 mark could be seen as a fresh trigger for bullish traders and supports prospects for additional gains. Hence, any meaningful pullback might still be seen as a buying opportunity and is more likely to remain limited, at least for the time being.
Technical levels to watch
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