EUR/GBP flirts with weekly high around 0.8470 area, upside potential seems limited

• EUR/GBP gains traction for the third straight day and climbs back closer to the weekly high.
• Stagflation fears continue to weigh on the British pound and remain supportive of the move.
• Energy supply concerns in Europe undermine the euro and warrant caution for bullish traders.

The EUR/GBP cross builds on this week's goodish rebound from sub-0.8400 levels and gains traction for the third successive day on Friday. The momentum lifts spot prices back closer to the weekly high, around the 0.8470 region during the early European session.

The British pound continues with its relative underperformance amid mounting stagflation fears and turns out to be a key factor acting as a tailwind for the EUR/GBP cross. Last week, the UK GDP report indicated that the economy contracted in the three months through June. Furthermore, the UK CPI report released on Wednesday showed that consumer prices accelerated to the highest level since 1982.

This comes on the back of the Bank of England's bleak economic outlook, which, along with Friday's mixed UK Retail Sales data, weighs on sterling and extends support to the EUR/GBP cross. The UK Office for National Statistics reported that retail sales plunged -by 3.4% YoY in July and core retail sales fell by 3.0% during the reported month. This, to a larger extent, overshadows positive monthly figures.

The shared currency, on the other hand, remains depressed amid concerns that an energy-supply crunch in the Eurozone could drag the economy faster and deeper into recession. Furthermore, the recent rise in European gas prices to fresh record highs worsens an already dire inflation outlook. This could make it a tough balancing act for the European Central Bank and weigh on the euro, capping the EUR/GBP cross.

The fundamental backdrop warrants some caution for aggressive bullish traders and makes it prudent to wait for strong follow-through buying before positioning for any further gains. Nevertheless, the EUR/GBP cross remains on track to record gains for the third successive week, though remains below the monthly swing high, just ahead of the 0.8500 psychological mark, touched on August 12.

Technical levels to watch