EUR/GBP struggles to find acceptance above 0.8700

• EUR/GBP remains below 0.8700 and the 200-day SMA during the first half of the European session.
• Concerns about a deeper economic recession in the Eurozone weaken the Euro and limit the pair’s rise.
• The Bank of England’s surprise pause continues to weigh on the British pound and acts as a tailwind for the cross.

The EUR/GBP cross continues its struggle to find acceptance above the 0.8700 level on Wednesday and retreats a few pips from the vicinity of the highest level since July 20 touched the previous day. The fundamental backdrop, meanwhile, suggests that the path of least resistance for the pair is to the upside, although bulls could still wait for a move above the technically significant 200-day SMA before opening new positions.

The British Pound (GBP) continues to be hurt by the Bank of England’s (BoE) surprise pause, which in turn is seen as a key factor acting as a tailwind for the EUR/GBP cross. The British central bank ended a streak of 14 consecutive interest rate hikes following the recent slowdown in inflation, signs of a cooling British labor market and renewed recession fears. The Bank of England’s Monetary Policy Committee voted 5-4 in favor of keeping the main rate at the highest level in 15 years, 5.25%.

For her part, the president of the European Central Bank, Christine Lagarde, declared on Monday that interest rates will be set at sufficiently restrictive levels as long as necessary. Furthermore, Frank Elderson, a member of the ECB Council, noted in an interview with Market News International that interest rates could still rise, if necessary. This downplays the view that the next move is likely to be a rate cut, contributing to the common currency’s relatively outperformance and lending support to the EUR/GBP cross.

That said, fears of a deep economic contraction in the eurozone suggest that further hikes could be ruled out for now. The release of the GfK German consumer confidence index, which fell to -26.5 in September from the previous month’s downwardly revised reading of -25.6, further fueled fears. This indicates that confidence in the eurozone’s largest economy remains fragile and that the ECB’s 14-month tightening cycle may have peaked.

This is preventing traders from opening new bullish positions around the EUR/GBP cross and limiting the upside. Therefore, it will be prudent to wait for sustained strength beyond the technically significant 200-day SMA before positioning for an extension of the recent bullish trajectory witnessed over the last month or so.

EUR/GBP technical levels to watch