EUR/GBP retakes 0.8600, struggles to capitalize on its recovery from over one-week low

• EUR/GBP rebounds from over a one-week low touched during the Asian session on Wednesday.
• The worsening UK economic outlook undermines the GBP and prompts intraday short-covering.
• Expectations that the ECB will end its rate-hiking cycle soon act as a headwind and .cap gains.

The EUR/GBP cross stages a modest recovery from over a one-week low touched during the Asian session on Wednesday and retakes the 0.8600 round-figure mark in the last hour. Spot prices, for now, seem to have snapped a two-day losing streak, though the mixed fundamental backdrop warrants some caution before placing aggressive bullish bets.

A bleak outlook for the UK economy undermines the British Pound (GBP), which turns out to be a key factor that prompts some intraday short-covering around the EUR/GBP cross. In fact, the National Institute of Economic and Social Research (NIESR) said that there was a 60% risk of the government going to the polls during a recession. In its quarterly update, the NIESR added that it would take until the third quarter of 2024 for UK output to return to its pre-pandemic peak.

This comes after a report from the British Retail Consortium showed on Tuesday that UK Retail Sales in July registered its weakest year-on-year growth since August 2022. Furthermore, the Recruitment and Employment Confederation (REC) said on Monday that British employers reduced the number of new permanent staff they hired through agencies by the most since mid-2020. This, along with the Bank of England's (BoE) less hawkish forward guidance, continues to undermine the GBP.

It is worth recalling that the BoE raised its key benchmark interest rate by 25 bps to a 15-year peak level of 5.25% last Thursday and signalled that the tightening cycle may be nearing an end. The UK central bank called its current monetary policy stance "restrictive" and forced investors to scale back expectations for the peak rate. However, speculations that the European Central Bank (ECB) will halt its streak of nine consecutive rate hikes in September might cap the upside for the EUR/GBP cross.

In fact, the ECB, in its economic bulletin published last Friday, noted that the underlying inflation in the region likely peaked during the first half of 2023. Adding to this, Fitch Ratings said on Friday that falling Euro Zone inflation puts ECB rates peak within sight. This makes it prudent to wait for strong follow-through buying before positioning for any further intraday appreciating move ahead of important UK macro releases, including the prelim Q2 GDP report, due on Friday.

Technical levels to watch