EUR/GBP struggles to find acceptance above 0.8700, bulls await move beyond 200-day SMA

• EUR/GBP remains below 0.8700 and the 200-day SMA through the first half of the European session.
• Worries about a deeper economic downturn in the Eurozone undermine the Euro and cap the upside.
• .The BoE’s surprise pause continues to weigh on the British Pound and acts as a tailwind for the cross.

The EUR/GBP cross continues with its struggle to find acceptance above the 0.8700 mark on Wednesday and retreats a few pips from the vicinity of the highest level since July 20 touched the previous day. The fundamental backdrop, meanwhile, suggests that the path of least resistance for spot prices is to the upside, though bulls might still wait for a move beyond a technically significant 200-day Simple Moving Average (SMA) before placing fresh bets.

The British Pound (GBP) continues to be undermined by the Bank of England's (BoE) surprise pause, which, in turn, is seen as a key factor acting as a tailwind for the EUR/GBP cross. The UK central bank ended a run of 14 straight interest rate hikes in the wake of the recent deceleration of inflation, signs that the UK labour market is cooling and reviving recession fears. The BoE's Monetary Policy Committee voted 5-4 in favour of maintaining the main policy rate at a 15-year high level of 5.25%.

The European Central Bank President Christine Lagarde, meanwhile, said on Monday that interest rates will be set at sufficiently restrictive levels for as long as necessary. Furthermore, ECB board member Frank Eldersonm, in an interview with Market News International, noted that interest rates could still go higher, if necessary. This downplays the view that the next move is likely to be a rate cut, which contributes to the shared currency's relative outperformance and lends support to the EUR/GBP cross.

That said, worries about a deep economic contraction in the Eurozone suggest that further hikes may be off the table for now. The fears were further fueled by the disappointing release of the forward-looking German GfK Consumer Climate Index, which fell to -26.5 in September from the previous month's downwardly revised reading of -25.6. This indicates that the confidence in the Eurozone’s largest economy remains fragile and that the ECB's 
14-month-long tightening cycle could have reached its peak.

This is holding back traders from placing fresh bullish bets around the EUR/GBP cross and capping the upside. Hence, it will be prudent to wait for a sustained strength beyond a technically significant 200-day SMA before positioning for an extension of the recent upward trajectory witnessed over the past month or so.

Technical levels to watch