EUR/GBP keeps the red post-Eurozone/UK PMIs, bears flirt with 0.8500 mark

• EUR/GBP witnessed some selling on Friday and has now erased the overnight post-ECB gains.
• The risk of a sovereign debt crisis, recession fears exerted pressure on the shared currency.
• Bets for a 50 bps BoE rate hike in August underpinned sterling and added to the selling bias.

The EUR/GBP cross extended the overnight pullback from the post-ECB swing high to the 0.8585 region, or the highest level since July 6 and witnessed some follow-through selling on Friday. The retracement slide extended through the early European session, though spot prices showed some resilience below the 0.8500 psychological mark.

The shared currency's relative underperformance comes amid the lack of specific details, conditionality and what would justify the activation of the ECB's anti-fragmentation tool. Adding to this, the recent widening of the Italian-German government bond yield spread has raised the risk of a sovereign debt crisis. This, along with mounting recession fears, overshadowed the ECB's jumbo 50 bps rate hike on Thursday, which continued undermining the euro and exerted downward pressure on the EUR/GBP cross.

The intraday selling picked up pace following the disappointing release of the Eurozone PMI prints. The preliminary manufacturing activity report from S&P Global/BME research showed that the downturn in the German manufacturing and services sectors gathered pace in July. In fact, The Manufacturing PMI in Eurozone’s economic powerhouse slumped to 25-month lows and the Services PMI dropped to the lowest level in seven months. Furthermore, the Eurozone Manufacturing PMI also unexpectedly contracted in July.

On the other hand, the British pound drew support from better-than-expected flash UK PMI prints for July. Apart from this, the rising possibility of a 50 bps rate hike by the Bank of England in August was seen as another factor that underpinned sterling. This, in turn, supports prospects for a further near-term depreciating move, suggesting that any meaningful still seems elusive.

Technical levels to watch