EUR/GBP drops to the lowest level since February 2020, around mid-0.8300s

• EUR/GBP turned lower for the second successive day and dropped to a near two-year low.
• Divergent BoE-ECB monetary policy outlooks continued attracting sellers at higher levels.
• The set-up favours bearish traders and supports prospects for additional near-term losses.

The EUR/GBP cross continued losing ground through the mid-European session and dropped to the lowest level since February 2020, around mid-0.8300s in the last hour.

Following an early uptick to the 0.8400 neighbourhood, the EUR/GBP cross met with a fresh supply on Tuesday and drifted into the negative territory for the second successive day. The British pound continued with its relative outperformance against its European counterpart amid the divergent Bank of England (BoE) and the European Central Bank (ECB) monetary policy outlooks.

In fact, the BoE delivered a surprise rate hike in December and the markets expect another three to four rate increases in 2022. Conversely, the ECB officials had talked down the need for any action to counter inflation. Apart from this, a stronger US dollar was seen as another factor that weighed on the shared currency and continued exerting pressure on the EUR/GBP cross.

The British pound was further supported by the fact that the UK Prime Minister Boris Johnson suggested that there would be no further tightening of measures soon. Johnson, however, warned that the health system will remain under strain amid the Omicron-driven surge in COVID-19 infections. This might hold back traders from placing fresh bearish bets around the EUR/GBP cross.

Meanwhile, technical indicators on the daily chart maintained their bearish bias and are still far from being in the oversold territory. This, in turn, suggests that the EUR/GBP cross is more likely to prolong its recent downward trajectory witnessed over the past one month or so. Hence, any attempted recovery move might still be seen as a selling opportunity.

Technical levels to watch