EUR/GBP holds steady just below two-month high after recovering from modest intraday losses

• EUR/GBP stalls its intraday corrective pullback from a two-month high touched on Thursday.
• The UK’s bleak economic outlook continues to weigh on the British pound and offers support.
• Modest USD strength and worries about an energy crisis in Europe seem to cap the upside.

The EUR/GBP cross attracts some dip-buying near the 0.8630-0.8625 area and stalls its intraday pullback from a two-month high touched earlier this Thursday. The cross is currently placed around mid-0.8600s, nearly unchanged for the day.

The British pound's relative underperformance comes amid the deteriorating outlook for the UK economy, which turns out to be a key factor acting as a tailwind for the EUR/GBP cross. This, along with the UK political uncertainty, overshadows bets for a 75 bps rate hike by the Bank of England and might continue to weigh on sterling.

Market participants seem concerned that if Liz Truss is named as the next UK Prime Minister, her government’s policies would diverge from the BoE. The shared currency, on the other hand, is drawing support from expectations for a more aggressive policy tightening by the Fed, reaffirmed by Wednesday's hotter Eurozone inflation figures.

That said, the underlying bullish sentiment surrounding the US dollar might hold back the euro bulls from placing aggressive bets. Apart from this, economic headwinds stemming from the possibility of an extreme energy crisis in Europe might also contribute to keeping a lid on any meaningful upside for the EUR/GBP cross, at least for the time being.

The mixed fundamental backdrop warrants some caution before positioning for an extension of the recent strong upward trajectory witnessed over the past week or so. Furthermore, the slightly overbought RSI (14) on the daily chart makes it prudent to wait for some near-term consolidation before placing fresh directional bets around the EUR/GBP cross.

Technical levels to watch