EUR/GBP jumps to one-and-half-week high, around mid-0.8500s on hawkish ECB policymakers

• EUR/GBP gained strong traction for the second straight day and jumped to over a one-week high.
• The shared currency continued drawing support from hawkish comments by the ECB policymakers.
• Brexit woes, softer UK PMIs weighed on the British pound and further provided a lift to the cross.

The EUR/GBP cross built on the overnight solid rebound from the 0.8435-0.8430 zone, or the 200-day SMA and gained strong follow-through traction for the second straight day on Tuesday. The momentum extended through the early part of the European session and pushed spot prices to over a one-week high, around mid-0.8500s in the last hour.

The shared currency's relative outperformance comes on the back of the overnight hawkish comments by the European Central Bank President Christine Lagarde, hinting at a probable rate hike in July. In a blog post, Lagarde said that the ECB was likely to lift the euro area deposit rate out of the negative territory by the end of September. She added that the central bank could raise interest rates further if it saw inflation stabilizing at 2%.

Adding to this, ECB Governing Council member Francois Villeroy de Galhau said that the central bank is in the process of normalising policy and that rate hikes in July and September are likely a done deal.  This, to a larger extent, helped offset mostly lower-than-expected Eurozone PMI prints for the month of May. Furthermore, the emergence of fresh selling around the US dollar remained supportive of the strong bid tone surrounding the euro.

On the other hand, the British pound was undermined by the UK-EU impasse over the Northern Ireland protocol. In fact, the British government last week announced legislation that would effectively override parts of a Brexit deal, fueling fears about a trade war in the middle of the cost-of-living crisis. This, along with the disappointing release of the flash UK PMIs, weighed on sterling and provided an additional lift to the EUR/GBP cross.

The fundamental backdrop now seems tilted in favour of bullish traders and supports prospects for additional gains. Hence, a subsequent move back towards reclaiming the 0.8600 mark, en-route the YTD peak around the 0.8615-0.8620 region, remains a distinct possibility.

Technical levels to watch