EUR/GBP flirts with 0.8500 mark, weekly lows on upbeat UK Services PMI

• EUR/GBP added to the overnight losses and witnessed some selling for the second straight day.
• The improving COVID-19 situation in the UK underpinned the sterling and exerted some pressure.
• A weaker USD extended some support to the euro and might help limit the downside for the cross.

The EUR/GBP cross dropped to fresh weekly lows during the first half of the European session, with bears now eyeing a sustained break below the key 0.8500 psychological mark.

The cross struggled to capitalize on its modest intraday gains, instead met with some fresh supply near the 0.8530-35 area and drifted into the negative territory for the second successive day. The British pound's relative outperformance comes amid 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. The GBP bulls further took cues from an upward revision of the UK Services PMI for July to 59.6 as against the flash estimate of 57.8.

The data provided further evidence of a more robust UK economic recovery. This has been fueling 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, in turn, was also seen as another factor that underpinned the GBP.

Hence, the key focus will be on the upcoming BoE monetary policy meeting on Thursday. The outcome will play a key role in determining the next leg of a directional move for the EUR/GBP cross. In the meantime, a modest pickup in demand for the shared currency – amid sustained US dollar selling – might help limit any deeper losses.

Technical levels to watch