EUR/GBP breaks below 200-DMA support and drops to two-month low, around 0.8400 mark

• EUR/GBP broke below the 200-DMA and dropped to a two-month low on Wednesday.
• Recession fears weighed on the shared currency and acted as a headwind for the cross.
• Jumbo BoE rate hike bets, the upbeat UK data contributed to sterling’s outperformance.

The EUR/GBP cross witnessed some selling during the first half of trading on Wednesday and broke below the very important 200-day SMA support. The subsequent downtick dragged spot prices to a nearly two-month low, around the 0.8410-0.8405 region during the early European session.

Investors remain concerned that the energy crisis in Europe could drag the region's economy faster and deeper into recession. The Eurozone is also facing the risk of broadening fragmentation amid the recent sharp rise in borrowing costs of more indebted countries because of the European Central Bank's tightening plan. This was seen as a key factor behind the shared currency's relative underperformance and exerted some downward pressure on the EUR/GBP cross.

On the other hand, the British pound was underpinned by rising odds for a 50 bps rate hike by the Bank of England in August and drew additional support from Wednesday's upbeat UK macro releases. The UK Office for National Statistics that the economy recorded a growth of 0.5% in May as against a flat reading expected. This also marked a sharp rebound from the 0.3% contraction reported in April and was accompanied by stronger data from the UK industrial sector.

In fact, the UK manufacturing output rose by 1.4% MoM in May as against 0.1% expectations and the 0.6%  fall booked in April. Adding to this, the total industrial output also surpassed estimates and jumped 0.9% in May from the 0.1% decline in the previous month. Apart from this, subdued US dollar price action was seen as another factor that benefitted sterling, which, in turn, contributed to the offered tone surrounding the EUR/GBP cross.

With the latest leg down, spot prices now seem to have confirmed a near-term bearish breakdown below a technically significant moving average. That said, the downside seems limited amid worries that the UK government's controversial Northern Ireland Protocol Bill could trigger a trade war with the European Union. This makes it prudent to wait for weakness below the 0.8400 mark before positioning for any further slide for the EUR/GBP cross.

Technical levels to watch