EUR/GBP struggles for a firm direction, remains confined in a range around 0.8700

• A combination of diverging forces fails to provide any meaningful impetus to EUR/GBP.
• The UK political uncertainty undermines The British pound and extends some support.
• Resurgent USD demand weighs on the common currency and seems to cap spot prices.

The EUR/GBP cross struggles to gain any meaningful traction and oscillates in a narrow band, around the 0.8700 mark through the first half of the European session on Wednesday.

The UK political uncertainty is seen as a key factor undermining the British pound, which, in turn, acts as a tailwind for the EUR/GBP cross. In fact, rebels within the ruling Tory Party are coming together to replace the newly-elected UK Prime Minister Liz Truss in the wake of the recent tax cut fiasco. Apart from this, looming recession risks might force the Bank of England to adopt a gradual approach towards raising interest rates This, to a larger extent, overshadows hotter-than-expected UK CPI, which jumped to a 40-year high, though did little to impress the GBP bulls.

The shared currency, on the other hand, draws support from rising bets for another jumbo 75 bps rate increase by the European Central Bank at the upcoming policy meeting on October 27. ECB President Christine Lagarde earlier this month referred to rate increases as the best tool to fight stubbornly high inflation. In fact, the final reading of the Eurozone Harmonised Index of Consumer Prices (HICP) report showed that inflation in the Eurozone surged to 9.9% YoY in September. That said, resurgent USD demand acts as a headwind for the euro and caps the upside for the EUR/GBP cross.

The mixed fundamental backdrop, though seems tilted in favour of bullish traders, warrants some caution before positioning for any further appreciating move. The market focus now shifts to the flash Eurozone PMI prints, due for release next week. The data might influence the common currency and provide some meaningful impetus to the EUR/GBP cross ahead of the crucial ECB monetary policy meeting.

Technical levels to watch