- EUR/GBP edged higher on Wednesday and recovered a major part of the overnight losses.
- A modest USD weakness benefitted the euro and remained supportive of the intraday uptick.
- Fresh Brexit jitters, disappointing UK macro releases acted as a headwind for the British pound.
- BoE-ECB monetary policy divergence warrants caution before placing aggressive bullish bets.
The EUR/GBP cross traded with a mild positive bias heading into the European session, albeit lacked any follow-through and the upside remained capped near the key 0.8500 psychological mark.
The cross attracted dip-buying in the vicinity of one-month lows touched earlier this week and for now, seems to have stalled the previous session's sharp pullback from multi-day tops. A modest US dollar pullback turned out to be one of the key factors behind the shared currency's relative outperformance on Wednesday.
On the other hand, the UK-EU stand-off over the Northern Ireland (NI) protocol and disappointing UK macro releases acted as a headwind for the British pound. This was seen as another factor that remained supportive of the bid tone surrounding the EUR/GBP cross, though any meaningful recovery move still seems elusive.
The Bank of England (BoE) officials, including Governor Andrew Bailey, signalled an imminent interest rate later this year over the weekend. Conversely, the European Central Bank (ECB) chief economist Philip Lane said that the medium-term inflation dynamic is too slow and that the trigger for monetary policy action is not there.
The diverging BoE-ECB monetary policy stance should hold traders from placing aggressive bullish bets around the euro and keep a lid on any further gains for the EUR/GBP cross. This makes it prudent to wait for a strong follow-through buying before traders start positioning for any further near-term appreciating move.