EUR/GBP sticks to modest gains, lacks follow-through beyond 0.8600/100-day SMA

• EUR/GBP stages a modest recovery from the monthly low touched on Thursday.
• A combination of factors underpins the shared currency and offers some support.
• Rising bets for additional BoE rate hikes benefit the GBP and seem to cap gains.

The EUR/GBP cross gains some positive traction on Friday and reverses a part of the overnight slide to a fresh monthly low. The cross maintains its bid tone through the early European session, though seems to struggle to capitalize on the strength beyond the 0.8600 mark and remains below the 100-day SMA.

The shared currency's relative outperformance could be attributed to talks of a more aggressive policy tightening by the European Central Bank (ECB). This, in turn, is seen as a key factor offering some support to the EUR/GBP cross. The ECB Governing Council member Isabel Schnabel said on Thursday that the central bank will probably need to raise rates further into restrictive territory. Schnabel added that the incoming data suggests that the room for slowing down the pace of interest rate adjustments remains limited.

Adding to this, the prevalent selling bias around the US Dollar, along with an upward revision of the German Q3 GDP print, benefit the Euro and act as a tailwind for the EUR/GBP cross. According to the final reading, the Eurozone's economic powerhouse expanded by 0.4% during the three months to September and the annual growth rate in Q3 2022 stood at 1.3% vs. the 1.2% estimated. The intraday uptick, however, lacks bullish conviction and remains capped amid the underlying bullish sentiment surrounding the British Pound.

The recent sharp decline in the UK government bond yields represents an easing of financial conditions, which should allow the Bank of England to continue raising borrowing costs to tame inflation. This, in turn, is seen underpinning the Sterling Pound and keeping a lid on any further gains for the EUR/GBP cross, at least for the time being. Hence, it will be prudent to wait for strong follow-through buying before confirming that spot prices have bottomed out and positioning for any meaningful appreciating move.

Technical levels to watch