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The EUR/GBP cross recovers modestly from a one-week low reached during Wednesday's Asian session and reclaims the 0.8600 round-figure level in the last hour. Currently, spot prices appear to have ended a two-day losing streak, but the mixed fundamental backdrop calls for caution before placing aggressive bullish wagers.

A gloomy outlook for the UK economy weakens the British Pound (GBP), which turns out to be a significant factor in intraday short-covering in the EUR/GBP cross. According to the National Institute of Economic and Social Research (NIESR), there is a 60% chance of a government election during a recession. The NIESR added in its quarterly update that it would take until the third quarter of 2024 for the UK's output to revert to its pre-pandemic peak.

This comes after a report released by the British Retail Consortium on Tuesday revealed that year-over-year growth in UK Retail Sales in July was the lowest since August 2022. In addition, the Recruitment and Employment Confederation (REC) reported on Monday that British employers have reduced the number of new permanent employees hired through agencies by the greatest amount since mid-2020. Together with the Bank of England's (BoE) less hawkish forward guidance, this continues to weaken the GBP.

Last Thursday, the BoE raised its key benchmark interest rate by 25 basis points to a 15-year high of 5.25% and signalled that the tightening cycle may be nearing its conclusion. The United Kingdom's central bank described its current monetary policy stance as "restrictive" and compelled investors to reduce their expectations for the peak interest rate. However, rumours that the European Central Bank (ECB) will end its streak of nine consecutive rate increases in September may limit the EUR/GBP cross's upside.

In fact, the ECB stated in its Friday economic bulletin that the region's underlying inflation likely crested during the first half of 2023. In addition, Fitch Ratings reported on Friday that declining Euro Zone inflation brings the ECB rate peak into view. Before positioning for any further intraday appreciation ahead of key UK macro releases, including the preliminary Q2 GDP report due on Friday, it is prudent to await strong follow-through buying.

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