EUR/GBP REMAINS ON THE DEFENSIVE, HOLDS ABOVE TWO-AND-HALF-WEEK LOW SET ON TUESDAY

• EUR/GBP edged lower for the third successive day, albeit lacked follow-through selling.
• A further rise in gas prices fueled recession fears and continued weighing on the euro.
• The UK political jitters acted as a headwind for sterling and should limit the downside.

The EUR/GBP cross struggled to capitalize on the previous day’s modest rebound from over a two-week low and attracted fresh selling near the 0.8600 mark on Wednesday. The cross maintained its offed tone and was last seen trading around the 0.8565-0.8570 region during the early European session.

The shared currency’s relative underperformance comes amid the risk of gas shortages that could disrupt industrial activity across the region if Russia cuts off supplies. Furthermore, concerns that a big jump in natural gas prices could drag the Eurozone economy faster and deeper into recession forced investors to trim ECB tightening bets. This, in turn, was seen as a key factor that dragged the EUR/GBP cross lower for the third successive day.

That said, the UK political jitters held back traders from placing bullish bets around the British pound and helped limit any deeper losses for the EUR/GBP cross, at least for the time being. In the latest developments, one of the vice-chairs of the UK’s ruling Conservative party, Bim Afolami, along with Chancellor Sunak and Health Minister Javid, announced their resignations. British Prime Minister Boris Johnson, however, reportedly has no plans to step down.

Apart from this, expectations that the Bank of England would adopt a gradual approach towards raising interest rates amid growing recession fears might continue to act as a headwind for sterling. This, in turn, supports prospects for the emergence of some dip-buying around the EUR/GBP cross, warranting some caution for aggressive bearish traders. Hence, it will be prudent to wait for strong follow-through selling before positioning for a further depreciating move.