EUR/GBP trades with modest gains above 0.8500, lacks bullish conviction

• EUR/GBP gained some positive traction on Friday and snapped two days of the losing streak.
• Brexit-related uncertainties turned out to be a key factor behind the GBP’s underperformance.
• Divergent BoE-ECB monetary policy outlooks warrants caution for aggressive bullish traders.

The EUR/GBP cross maintained its bid tone through the first half of the European session and was last seen trading just above the 0.8500 round-figure mark.

Having touched a three-day low earlier this Friday, the EUR/GBP cross managed to gain some positive traction and recovered a part of the previous day's losses. Persistent Brexit-related uncertainties turned out to be a key factor behind the British pound's relative underperformance. This, in turn, assisted the cross to snap two consecutive days of the losing streak and stall this week's corrective pullback from the 0.8535-40 region.

On the economic data front, a downward revision of the Eurozone Services PMI was offset by a rather unimpressive final UK Services PMI and did little to provide any meaningful impetus. That said, the divergent Bank of England and the European Central Bank monetary policy outlooks could hold back bullish traders from placing aggressive bets and cap gains for the EUR/GBP cross. This, in turn, warrants some caution for bullish traders.

The BoE is widely expected to hike interest rates at its upcoming monetary policy meeting on December 16. Conversely, the ECB officials have been pushing back against market bets for tighter policy and talked down the need for any action to counter inflation. In fact, the ECB President Christine Lagarde said this Friday that it is very unlikely to see rate hikes next year and sees inflation moving back towards the target in course of 2022.

Hence, it will be prudent to wait for some follow-through buying before positioning for an extension of the recent strong recovery move from the 0.8380 region, or the lowest level since February 2020 touched in November. However, the downside seems cushioned, at least for the time being, as investors assess the impact of the new and possible vaccine-resistant Omicron variant of the coronavirus on economic recoveries.

Technical levels to watch