EUR/GBP dives to four-week low, below mid-0.8400s amid broad-based GBP strength

• EUR/GBP remained under heavy selling pressure for the third successive day on Thursday.
• Receding Omicron fears turned out to be a key factor behind the sterling’s outperformance.
• Brexit-related uncertainties might hold back bearish traders and help limit any further losses.

The EUR/GBP cross witnessed aggressive selling since the early European session and dived to a four-week low, below mid-0.8400s in the last hour.

The cross struggled to capitalize on its early positive move and faced rejection near the key 0.8500 psychological mark on Thursday. The sharp fall for the third successive day was exclusively sponsored by a strong follow-through buying around the British pound.

Worries about surging COVID-19 cases in the UK were offset by the optimism led by reports that the current vaccines may be more effective than first thought in fighting the new variant. This, in turn, was seen as a key factor behind the sterling's outperformance.

On the other hand, the shared currency was weighed down by a modest US dollar strength, which further contributed to the EUR/GBP pair's sharp intraday slide. That said, the UK-EU impasse over the Northern Ireland Protocol could act as a headwind for the GBP and limit losses.

The UK Foreign Minister Liz Truss – now in charge of Brexit negotiations – said that their position on the Northern Ireland Protocol remains unchanged. Truss reiterated that the UK remains prepared to trigger Article 16 if the role of the ECJ as a final arbiter is not ended.

From a technical perspective, the recent pullback from a downward sloping trend-line and repeated failures to find acceptance above the very important 200-day SMA supports prospects further losses. Hence, any attempted recovery runs the risk of fizzling out rather quickly.

That said, relatively thin liquidity conditions heading into the end-of-year holiday season might hold back traders from placing aggressive bearish bets amid absent relevant market-moving economic data. Nevertheless, the bias remains tilted firmly in favour of bearish traders.

Technical levels to watch