EUR/GBP recovers further from multi-month lows, back above mid-0.8400s

• EUR/GBP staged a modest bounce after dropping to fresh 18-month lows earlier this Wednesday.
• Softer UK CPI weighed on the British pound and prompted a short-covering move around the cross.
• BoE rate hike expectations, the emergence of some selling around the common currency capped gains

The EUR/GBP cross edged higher through the mid-European session and climbed back above mid-0.8400s, refreshing daily tops in the last hour.

The cross quickly reversed an intraday dip to the 0.8420 region, or the lowest level since February 2020 and inched back closer to the top end of its weekly trading range. Softer-than-expected UK CPI print turned out to be one of the key factors behind the British pound's relative underperformance and prompted some short-covering around the EUR/GBP cross.

The UK Office for National Statistics reported that the headline CPI decelerated to 0.3% MoM in September as against expectations for a fall to 0.4% from 0.7% reported in the previous month. Adding to this, the yearly rate unexpectedly edged lower from 3.2% in August to 3.1% during the reported month, still well above the Bank of England's 2% target.

Investors, however, seem convinced that the decline will be temporary and expect that the BoE will increase interest rates from record lows as soon as November. Apart from this, the emergence of some selling around the shared currency – led by a modest pickup in the US dollar demand – should keep a lid on any meaningful gains for the EUR/GBP cross.

Hence, any subsequent positive move might still be seen as an opportunity for bearish traders and runs the risk of fizzling out rather quickly. This, in turn, makes it prudent to wait for a strong follow-through buying before confirming that the EUR/GBP cross has bottomed out in the near term and positioning for any meaningful recovery.

Technical levels to watch