EUR/GBP corrects from multi-week high, slides below mid-0.8400s on dismal German data

• EUR/GBP witnessed some selling on Monday and eroded a part of the post-ECB strong gains.
• Disappointing German macro data undermined the euro and contributed to the selling bias.
• Fresh Brexit tensions should act as a headwind for sterling and help limit any deeper losses.

The EUR/GBP cross edged lower during the early European session and dropped to a fresh daily low, around the 0.8440 region in the last hour.

Following an early uptick to the 0.8465-0.8470 region, the EUR/GBP cross witnessed some profit-taking on Monday and for now, seems to have stalled its post-ECB strong recovery from the two-year low. It is worth recalling that the ECB President Christine Lagarde acknowledged mounting inflation risks and did not repeat the previous guidance that a rate hike this year was extremely unlikely. This, in turn, was seen as a key factor that boosted the shared currency and prompted aggressive short-covering around the EUR/GBP cross.

That said, a more hawkish Bank of England (BoE) decision last week continued acting as a tailwind for the British pound and capped the upside for the EUR/GBP cross, at least for the time being. The BoE raised interest rates by 25 bps on expected lines and four out of nine MPC members voted for an aggressive 50 bps hike in borrowing costs. Apart from this, the disappointing release of the German Industrial Production, which unexpectedly fell by 0.3% in December, exerted some downward pressure on the cross on Monday.

The downside, however, seems limited, at least for now, amid fresh tensions over the Northern Ireland protocol of the Brexit agreement. In the latest development, Northern Ireland's Agriculture Minister ordered to halt all post-Brexit checks on agri-food goods coming into the region from the rest of the UK. Adding to this, a German official said on Thursday that Britain should respect post-Brexit trade rules or else face consequences. This, in turn, supports prospects for the emergence of some dip-buying around the EUR/GBP cross.

Hence, it will be prudent to wait for a strong follow-through selling before confirming that the recent strong recovery move has run its course and positioning for any further decline. There isn't any major market-moving economic data due for release from the UK on Monday. Meanwhile, the Eurozone economic docket also features the release of the Sentix Investor Confidence. This, along with ECB President Lagarde's speech, should influence the common currency and produce some trading opportunities around the EUR/GBP cross.

Technical levels to watch