EUR/GBP flirts with 0.8500, downside seems limited ahead of this week’s BoE/ECB meetings

• EUR/GBP witnessed some follow-through selling for the third successive day on Monday.
• A more ECB dovish was seen as a key factor behind the euro’s relative underperformance.
• Diminishing BoE rate hike bets should cap the upside for the GBP and help limit the slide.

The EUR/GBP cross dropped to a multi-day low during the mid-European session, with bears now awaiting a sustained break below the key 0.8500 psychological mark.

The cross extended last week's retracement slide from the 0.8600 neighbourhood, or the highest level since early October and remained under some selling pressure for the third successive day on Monday. The shared currency's relative underperformance could be attributed to a more dovish stance adopted by the European Central Bank (ECB).

In fact, policymakers have been pushing back on market bets for tighter policy and talked down the need for any action to counter inflation. That said, a combination of factors should hold back traders from placing aggressive bullish bets around the British pound and help limit any deeper losses for the EUR/GBP cross, at least for now.

News that the UK Prime Minister Boris Johnson could impose additional COVID-19 restrictions forced investors to further push back their expectations for an imminent interest rate hike by the Bank of England (BoE) in December. Last week, Johnson advised people to work from home and mandated the use of vaccine passports in large venues.

Apart from this, investors might also prefer to wait on the sidelines ahead of this week's key central bank event risks. Both the BoE and the ECB are scheduled to announce their respective decisions on Thursday. This, in turn, will play a key role in determining the next leg of a directional move for the EUR/GBP cross.

Hence, it will be prudent to wait for a strong follow-through selling before confirming that the recent strong recovery move from the lowest level since February 2020 has run out of steam. In the absence of any major market-moving economic releases, traders on Monday will take cues from the BoE Governor Andrew Bailey's scheduled speech.

Technical levels to watch