EUR/GBP clings to modest gains, lacks follow-through beyond 0.8700 mark

• The sterling’s relative underperformance helped EUR/GBP to regain traction on Friday.
• Disappointing German GDP print, stronger USD weighed on the euro and capped gains.
• Upbeat Eurozone GDP/CPI figures failed to impress bulls or provide any fresh impetus.

The EUR/GBP cross held on to its modest intraday gains post-EU macro data, with bulls still awaiting a sustained move beyond the 0.8700 round-figure mark.

The cross managed to regain some positive traction on the last trading day of the week and has now moved back closer to the top end of a four-day-old trading range. The British pound's relative underperformance against its European counterpart could be attributed to the risk posed by the Scottish elections next week.

Polls are pointing to a supermajority for pro-independence parties in Scotland's parliament, which might intensify pressure for a referendum on independence. This, to a larger extent, offset the optimism over a strong recovery in the UK – bolstered by the easing of COVID-19 restriction – and acted as a headwind for the sterling.

Despite the supporting factor, the upside for the EUR/GBP cross remains limited amid the emergence of some selling around the shared currency. A modest US dollar strength was seen as a key factor weighing on the euro, which lost some additional ground following the release of worse than expected prelim German GDP print for the first quarter.

In fact, the Eurozone's largest economy contracted by 1.7% during the January-March period as against the 1.5% fall anticipated and 0.3% growth recorded in the previous quarter. Conversely, the Eurozone economy shrank 0.6% during the first three months of 2021, beating consensus estimates pointing to a -0.8% decline and the -0.7% previous.

Separately, the preliminary Eurozone inflation report came in to show the headline CPI is seen rising 1.6% YoY in April, up from 1.3% in the previous month. However, the core reading showed no signs of rising inflationary pressure, which should do little to convince the ECB to change its current policy stance and hence, failed to inspire the euro bulls.

It will now be interesting to see if the EUR/GBP cross is able to capitalize on the positive move or continues with its struggle to find acceptance above the 0.8700 mark. This makes it prudent to wait for some strong follow-through buying beyond the 0.8715-20 supply zone before positioning for any further appreciating move.

Technical levels to watch