EUR/GBP climbs to over one-week high, around 0.8435 region

• EUR/GBP regained positive traction on Thursday and recovered further from YTD low.
• Brexit uncertainties undermined the sterling and remained supportive of the move up.
• Some USD profit-taking benefitted the euro and further extended support to the cross.
• Dovish ECB outlook might hold back bulls from placing fresh bets and cap further gains.

The EUR/GBP cross continued gaining traction through the mid-European session and climbed to an over one-week high, around the 0.8430-35 region.

The cross caught fresh bids on Thursday and is now looking to build on this week's recovery move from the 0.8280 support area, or the lowest level since February 2020. The British pound's relative underperformance against its European counterpart comes amid the worsening row over the post-Brexit fishing rights between France and Britain.

This, to a larger extent, overshadowed the latest report, indicating that Britain would hold off suspending parts of the Brexit divorce deal relating to Northern Ireland for as long as talks with the EU remain constructive. Even the prospects for an imminent interest rate hike by the Bank of England did little to impress the GBP bulls.

On the other hand, the shared currency benefitted from some US dollar profit-taking from a 16-month peak. That said, the rising number of COVID-19 cases and the imposition of fresh lockdown measures might act as a headwind for the euro. This, in turn, could hold back bullish traders from placing aggressive bets around the EUR/GBP cross.

Fresh COVID-19 jitters have fueled concerns about a significant slowdown in the Eurozone economic activity, which could be another reason for the European Central Bank (ECB) to be more dovish. It is worth mentioning that the ECB officials have been pushing back against bets for tighter policy and talked down the need for any action to counter inflation.

This was reinforced by the accounts (minutes) of the October ECB monetary policy meeting, which stated: "It was deemed important for the governing council to avoid an overreaction as well as unwarranted inaction, and to keep sufficient optionality in calibrating its monetary policy measures to address all inflation scenarios that might unfold."

The fundamental backdrop warrants some caution before confirming that the EUR/GBP cross has bottomed out in the near term and positioning for any meaningful recovery. Hence, the move up might still be categorized as a short-covering bounce, which runs the risk of fizzling out rather quickly amid absent relevant fundamental catalyst.

Technical levels to watch