- EUR/GBP fell to a fresh multi-year low during the early European session on Friday.
- Stagflation fears turned out to be a key factor that weighed on the shared currency.
- Stronger USD exerted pressure on sterling and help limit losses, for the time being.
The EUR/GBP cross edged lower through the early European session and dropped to a fresh multi-year low, around the 0.8260 region in the last hour.
Following the previous day's brief pause, the EUR/GBP cross edged lower for the fifth successive day on Friday and prolonged its recent decline from the 0.8400 round-figure mark. Concerns that the war in Ukraine could dampen the pace of the recovery in the Eurozone turned out to be a key factor behind the shared currency's relative underperformance against its British counterpart.
The European economy is expected to suffer from the spillover effects in the form of even higher energy prices, which could further stoke inflation. Moreover, the European Central Bank's chief economist, Philip Lane, noted that the Ukraine conflict may reduce the Eurozone's GDP by 0.3% to 0.4% this year. This has been fueling the risk of stagflation and weighing on the euro.
In a further escalation of the Russia-Ukraine war, Russian troops attacked Europe's largest nuclear power plant in Ukraine earlier this Friday. Adding to this, Ukraine regional authority confirmed that Zaporizhzhia nuclear power plant has been seized by Russian military forces. Moreover, media reports suggest that gas flowing from Russia to Europe has come to a halt.
The latest geopolitical developments dashed hopes that the ECB would start normalising monetary policy at the upcoming meeting on March 10. This was seen as another factor that contributed to the EUR/GBP pair's ongoing slide to the lowest level since June 2016. That said, sustained US dollar strength weighed on the British pound and might lend some support to the cross.
Nevertheless, the fundamental backdrop supports should continue to undermine the single currency and supports prospects for further losses for the EUR/GBP cross. Hence, any attempted recovery could be seen as a selling opportunity and fizzle out quickly. That said, bearish traders are likely to wait for some follow-through selling below mid-0.8200s before placing fresh bets.
Technical levels to watch