EUR/GBP bounces off multi-day low, reverses an intraday dip to sub-0.8600 levels

• EUR/GBP remains under some selling pressure for the second successive day on Tuesday.
• Hopes for a fiscal boost from the new UK PM, more aggressive BoE rate hikes lift the GBP.
• The euro draws support from a weaker USD and helps limit any further losses for the cross.

The EUR/GBP cross is extending its retracement slide from a two-month high touched last week and losing ground for the second successive day on Tuesday. The downward trajectory drags spot prices to a four-day low during the early European session, though bulls show some resilience below the 0.8600 mark.

The news British Prime Minister Liz Truss is expected to finalize a two-year package of energy relief for households and businesses within days. This comes at a time when the country is facing a cost-of-living crisis and provides a much-needed respite to the British pound. This, along with hawkish remarks by the Bank of England policymaker Catherine Mann, is seen as another factor behind sterling's relative outperformance and exerts downward pressure on the EUR/GBP cross.

That said, a bleak outlook for the UK economy holds back the GBP bulls from placing aggressive bets. It is worth recalling that the Bank of England had warned last month that the UK economy will enter a prolonged recession during Q4 2022. Adding to this, the British Chambers of Commerce (BCC) now expects the UK economy to record three consecutive quarters of contraction. This, along with a modest pickup in demand for the shared currency helps limit losses for the EUR/GBP cross.

The euro draws some support from the ongoing US dollar profit-taking slide from a two-decade high set on Monday. That said, worries about a potential economic recession in the Eurozone, fueled by Russia's indefinite closure of its main gas supply pipeline, could act as a headwind for the common currency. The mixed fundamental backdrop warrants some caution before placing aggressive directional bets around the EUR/GBP cross amid absent relevant market-moving economic releases on Tuesday.

Investors might also prefer to move to the sidelines ahead of the key event risk - the European Central Bank meeting on Thursday. The record-high inflation in the Eurozone has raised expectations for another bumper interest hike by the ECB. Nevertheless, the outcome and the near-term policy outlook will play a key role in influencing the euro and help determine the next leg of a directional move for the EUR/GBP cross.

Technical levels to watch