EUR/GBP sits near three-week high, around 0.8665 area as traders keenly await UK GDP

• EUR/GBP gains some positive traction for the third straight day and climbs to a three-week top.
• A bleak outlook for the UK economy continues to undermine the GBP and remains supportive.
• Speculations that the ECB will end its rate-hiking cycle cap gains ahead of the UK macro data.

The EUR/GBP cross touches a three-week high, around the 0.8670 area, during the Asian session on Friday and looks to build on its strong weekly gains registered over the past two days.

Despite the recent surge in European gas prices, the shared currency continues to outperform its British counterpart in the wake of a further rise in German bond yields. Apart from this, a bleak outlook for the UK economy continues to undermine the Sterling Pound and turns out to be another factor acting as a tailwind for the EUR/GBP cross. It is worth recalling that the National Institute of Economic and Social Research (NIESR) said earlier this week that it would take until the third quarter of 2024 for UK output to return to its pre-pandemic peak.

In its quarterly update, the NIESR added that there was a 60% risk of the government going to the polls during a recession. This comes on the back of the Bank of England's (BoE) less hawkish forward guidance, signalling that the tightening cycle may be nearing an end, and pushes the EUR/GBP cross higher for the third straight day. Traders, however, seem reluctant to place aggressive bullish bets and prefer to wait on the sidelines ahead of the key UK macro data, including the preliminary Q2 GDP report, due for release this Friday.

Any signs of unexpected strength or weakness in the economy will influence expectations about the BoE's future rate-hike path and impact the British Pound, which has been struggling to gain any meaningful traction, so far, in August. In the meantime,  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. The ECB economic bulletin published last Friday noted that the underlying inflation in the region likely peaked during the first half of 2023.

Apart from this, the worsening economic conditions and mounting recession fears might further contribute to keeping a lid on any meaningful appreciating move for the Euro. Nevertheless, the EUR/GBP cross, at current levels, remains on track to register gains for the second successive week as market participants now look to the UK economic docket to grab short-term trading opportunities.

Technical levels to watch