EUR/GBP bears flirt with YTD lows, around mid-0.8400s

• A combination of factors prompted fresh selling around EUR/GBP on Friday.
• Dovish ECB tilt was seen as a key factor behind the euro’s underperformance.
• Positive Brexit-related headlines underpinned the GBP and exerted pressure.

The EUR/GBP cross witnessed heavy selling during the early European session and refreshed daily lows, around the 0.8455 region in the last hour.

The cross struggled to capitalize on a modest intraday uptick, instead met with some fresh supply near the 0.8485 area and has now drifted back closer to YTD lows touched on August 12. The shared currency's relative underperformance comes amid a flurry of dovish comments by core members of the ECB, stressing that the recent rise in inflationary pressures is mostly transitory.

The ECB President, Christine Lagarde said on Thursday the upswing in inflation is largely driven by temporary factors. This was followed by comments by the ECB governing council member, Pierre Wunsch, noting that the rising price pressures in the Euro area are transitory. This underscores the policymakers' desire to avoid any premature withdrawal of policy accommodation.

Conversely, the money market had fully priced in a 25bps rate hike by the Bank of England in December, though two officials signalled that they’re in no rush to raise interest rates. Nevertheless, a more hawkish BoE acted as a tailwind for the British pound, which was further supported by positive developments around the Northern Ireland Protocol of the Brexit agreement.

After days of rising tensions, the European Union agreed to scrap most checks on goods and medicines arriving into Northern Ireland from the rest of the UK. That said, fears that the UK will reject the EU's proposal might hold the GBP bulls from placing aggressive bets. This, along with a weaker US dollar, might lend some support to the euro and limit losses for the EUR/GBP cross.

Hence, it will be prudent to wait for some follow-through selling below mid-0.8400s before positioning for an extension of the recent depreciating move witnessed over the past three weeks or so. The EUR/GBP cross might then accelerate the downward trajectory towards testing the next relevant support near the 0.8400 round-figure mark.

Technical levels to watch