EUR/GBP remains depressed near session lows, around 0.8535-30 region

• EUR/GBP edged lower on Tuesday and moved extended the overnight pullback from one-week tops.
• The improving COVID-19 situations in the UK underpinned the British pound and exerted pressure.
• A weaker USD provided a modest lift to the euro and helped limit any further losses for the cross.

The EUR/GBP cross maintained its offered tone through the mid-European session and was last seen trading around the 0.8535 region, just a few pips above daily lows.

The cross witnessed some selling on Tuesday and retreated further from one-week tops, around the 0.8555-60 region touched in the previous day. The British pound's relative outperformance could be attributed to the optimism over the declining trend of new COVID-19 cases in the UK. Apart from this, the European Union's decision to pause legal proceedings against the UK over the Northern Ireland protocol dispute further acted as a tailwind for the sterling.

Meanwhile, evidence of a more robust UK economic recovery now seemed to have fueled speculations that the Bank of England (BoE) could be among the first major central banks to begin the process of weaning its economy off stimulus support. This was also seen as another factor that underpinned the GBP. That said, a modest pickup in demand for the shared currency helped any deeper losses for the EUR/GBP cross, warranting some caution for aggressive bearish traders.

Investors now seem convinced that the Fed will wait for a longer period before slowing its massive monetary support. This, along with the risk-on impulse in the markets, weighed on the safe-haven US dollar and extended some support to the euro. This makes it prudent to wait for some strong follow-through selling before positioning for any further decline for the EUR/GBP cross and confirming that the recent bounce from near four-month lows has run out of steam.

Technical levels to watch