EUR/GBP clings to gains above 0.8700, seems poised to climb further ahead of ECB on Thursday

• EUR/GBP catches aggressive bids on Wednesday and moves back closer to a multi-month top.
• Expectations that the BoE is done hiking rates undermine the GBP and lend support to the cross.
• Speculations that the ECB will maintain the status quo on Thursday might cap any further gains.

The EUR/GBP cross, having shown resilience below the 200-day SMA the previous day, attracts fresh buying on Wednesday and builds on its intraday gains through the early part of the European session. Spot prices currently trade around the 0.8720-0.8725 region and remain well within the striking distance of the highest level since May 8 touched last Friday.

As investors digest the upbeat UK labour market data released on Tuesday, speculations that the Bank of England (BoE) could maintain the status quo in November turn out to be a key factor behind the British Pound's relative underperformance. This, in turn, is seen as a key factor acting as a tailwind for the EUR/GBP cross, which gets an additional boost following the release of the better-than-expected German IFO survey.

In fact, the headline German IFO Business Climate Index arrived at 86.9 in October, up from the previous month's reading of 85.8 while beating the market expectations of 85.9. Adding to this, the Current Economic Assessment Index rose to 89.2 points in the reported month, compared with September’s 88.7 and 88.5 estimated. Furthermore, the IFO Expectations Index climbed to 84.7 in October from 83.1 in September.

That said, growing acceptance that the European Central Bank (ECB) will halt the most aggressive interest rate-hiking cycle on Thursday might hold back bulls from placing aggressive bets around the EUR/GBP cross. The ECB signalled in September that the hike, its 10th in a 14-month-long fight against inflation, was likely to be its last. Adding to this, stagflation risk could force the ECB to maintain the status quo.

The aforementioned mixed fundamental backdrop warrants some caution before positioning for any further appreciating move. From a technical perspective, however, the recent breakout and acceptance above the 200-day SMA suggests that the path of least resistance for the EUR/GBP cross is to the upside. Hence, a move beyond the monthly swing low, around the 0.8740 zone, looks like a distinct possibility.

Technical levels to watch