EUR/GBP flirts with daily lows, around 0.8425 region ahead of ECB

• EUR/GBP witnessed some selling on Thursday and extended the overnight retracement slide.
• The British pound’s relative outperformance could be attributed to hawkish BoE expectations.
• The downside seems limited as the focus remains on the highly-anticipated ECB policy meeting.

The EUR/GBP cross edged lower through the first half of the European session and dropped to fresh daily lows, around the 0.8425 region in the last hour.

The cross struggled to capitalize on its early uptick to mid-0.8400s, instead met with some fresh supply on Thursday and extended the previous day's pullback from the 0.8465-70 supply zone. The British pound's relative outperformance comes on the back of the UK finance minister Rishi Sunak's upbeat economic assessment during the annual budget presentation on Wednesday.

The Office for Budget Responsibility (OBR) forecasted UK GDP to grow 6.5% this year and 6% in 2022. The OBR sees inflation to average 4% next year, well above the Bank of England’s 2% target. This reinforced expectations that the BoE will hike interest rate at the upcoming policy meeting, which further acted as a tailwind for the sterling and exerted pressure on the EUR/GBP cross.

On the other hand, the emergence of fresh US dollar buying weighed on the shared currency and further contributed to the offered tone surrounding the EUR/GBP cross. The downside, however, seems cushioned amid fresh Brexit jitters. Investors might also refrain from placing aggressive bets ahead of the highly-anticipated European Central Bank (ECB) monetary policy meeting on Thursday.

In the latest Brexit-related developments, France announced that it will tighten checks on UK boats and trucks and may also restrict energy supplies to the Channel Islands if there is no agreement on fishing rights by November 2. Separately, the UK Prime Minister said that conditions had been met to invoke Article 16 unless they see rapid progress on the Northern Ireland protocol.

Even from a technical perspective, the EUR/GBP cross – barring a knee-jerk slide on Tuesday – has been oscillating in a broader trading range over the past two weeks or so. This constitutes the formation of a rectangle on short-term charts and points to indecision amongst traders. This further warrants some caution before positioning for a firm near-term direction.

Technical levels to watch