EUR/GBP drops to over one-week low, bears flirt with 0.8700 mark

• EUR/GBP turns lower for the fifth straight day and drops to over a one-week low on Monday.
• UK government withdraws tax cut plan, which boosts sterling and exerts pressure on the cross.
• Recession fears, modest USD strength weighs on the euro and contributes to the offered tone.

The EUR/GBP cross attracts fresh selling following an early uptick to the 0.8830 region and turns lower for the fifth successive day on Monday. Spot prices drop to over a one-week low during the mid-European session, with bears now awaiting sustained weakness below the 0.8700 round-figure mark.

UK Finance minister Kwasi Kwarteng takes a U-turn on Monday and confirms that his government will not go ahead with a plan to cut the top rate of income tax from 45%. This, in turn, is seen as a key factor behind the British pound's relative outperformance against its European counterpart and exerting downward pressure on the EUR/GBP cross.

The shared currency, on the other hand, is undermined by speculation of a potential recession in the region amid the risk of a further escalation in the Russia-Ukraine conflict. This, along with a modest US dollar strength, weighs on the euro and contributes to the offered tone surrounding the EUR/GBP cross, supporting prospects for further losses.

That said, a bleak outlook for the UK economy might hold back the GBP bulls from placing aggressive bets and lend some support to the EUR/GBP cross, at least for the time being. Nevertheless, spot prices have retreated over 500 pips from a two-year high, around the 0.9235 region touched in September and seem vulnerable to prolonging the descending trend.

Technical levels to watch