EUR/GBP jumps to fresh two-week high as British pound extends steep intraday decline

• EUR/GBP gained strong positive traction on Friday and surged to a near two-week high.
• Dismal UK Retail Sales weighed heavily on the British pound and remained supportive.
• Bets for an early ECB rate hike underpinned the euro and provided an additional boost.

The EUR/GBP cross caught aggressive bids during the early European session and rallied to a two-week high, around the 0.8375-0.8380 region in the last hour.

Following the overnight sharp intraday pullback of around 70 pips, the EUR/GBP cross regained strong positive traction on Friday amid the emergence of heavy selling around the British pound. The UK Office for National Statistics reported that Retail Sales declined by 1.4% in March as against a fall of 0.3% anticipated. Moreover, sales excluding the auto motor fuel sales also missed estimates and dropped 1.1% during the reported month, suggesting that soaring inflation is impacting consumption.

Apart from this, the more hawkish remarks by some ECB policymakers this week lifted bets for a 25 bps rate hike in July and further contributed to the shared currency's relative outperformance. It is worth recalling that ECB Vice President Luis de Guindos had said that a rate hike is possible in the second half of the year. Adding to this, ECB Governing Council member Pierre Wunsch suggested a probable rate hike in July and also anticipated that rates could be positive as soon as this year.

Furthermore, Joachim Nagel, President of the Deutsche Bundesbank, noted that the ECB could raise interest rates at the start of the third quarter. ECB President Christine Lagarde, however, said that the central bank may need to cut its growth outlook further amid concerns about the fallout from Russia's invasion of Ukraine. This, in turn, suggests that the market is setting itself up for a disappointment and warrants caution before placing aggressive bullish bets around the EUR/GBP cross.

On the economic data front, mixed German flash PMI prints further make it prudent to wait for sustained move back above the 0.8400 mark before confirming that the EUR/GBP cross has bottomed out. This will set the stage for additional gains and allow bulls to aim back to challenge the very important 200-day SMA, currently around mid-0.8400s. Market participants now look forward to the Bank of England Governor Andrew Bailey's appearance later during the US session for a fresh impetus.

Technical levels to watch