EUR/GBP clings to intraday gains below mid-0.8800s, upside potential seems limited

• EUR/GBP catches aggressive bids on Thursday and snaps a three-day losing streak.
• The UK’s bleak outlook undermines the Sterling and acts as a tailwind for the cross.
• Diminishing odds for a more aggressive ECB tightening could cap any further gains.

The EUR/GBP cross regains strong positive traction on Thursday and stalls its recent pullback from its highest level since late September. The cross maintains its bid tone through the first half of the European session and is currently placed near the top end of its daily range, just below mid-0.8800s.

The British Pound's relative underperformance comes amid a bleak outlook for the UK economy, which, in turn, is seen lending some support to the EUR/GBP cross. In fact, the UK Manufacturing PMI was finalized at 45.3 in December - marking the lowest level in 31 months. Adding to this, the gauge for the UK services sector remained in contraction territory for the third successive month in December.

The shared currency, on the other hand, draws some support from subdued US Dollar demand, weighed down by the prospects for smaller rate hikes by the Fed. That said, softer German consumer inflation figures released earlier this week pushed back expectations for a more aggressive policy tightening by the European Central Bank. This, in turn, could keep a lid on the Euro and cap the EUR/GBP cross.

Apart from this, worries about economic headwinds stemming from the protracted Russia-Ukraine war warrant some caution for bullish traders. Hence, it will be prudent to wait for strong follow-through buying before positioning for the resumption of the recent move-up witnessed over the past four weeks or so.  Nevertheless, the EUR/GBP cross, for now, seems to have snapped a three-day losing streak to a nearly two-week low.

Technical levels to watch