EUR/GBP a little higher, but still well below last week’s pre-BoE levels

• EUR/GBP is a little higher on the day but has fallen back from highs in the 0.8790s.
• There has been a lack of fundamental catalysts on Monday as the pair looks ahead to events later this week.

EUR/GBP has been relatively uneventful on the first trading day of the week; the pair rallied as high as the 0.8790s during the European morning session, but has since fallen back to closer to 0.8770 and is now only up around 0.1% or under 10 pips on the day. The pair still trades well below its pre-last week’s Bank of England meeting levels of above 0.8820; as a recap, the bank came across as less dovish than expected in its messaging on negative interest rates (though they were added the bank’s toolbox, the bank made it clear this did not mean it was definitely going to use them), its guidance for asset purchases (there was talk about tapering the pace of purchases soon) and on the UK’s economic outlook.

Technically speaking, the pair continues to look bearish given that it still trades within the confines of a long-term downwards trend channel; the upper bounds of this trend channel is a downtrend linking 22, 26, 28 January and 4 February highs and the lower bounds of this trend channel is a downtrend linking the 31 December, 14, 20, 21 January and 5 February lows.

Driving the day

It’s been a subdued day for the most part for EUR/GBP and price action-driving fundamental catalysts have been absent. It seems as though the pair is looking forward to key risk events later in the week, when things are likely to get much more interesting; there is not much data of interest coming out of the Eurozone this week, but there are a few speaker, including ECB Chief Economist Philip Lane on Tuesday and ECB Vice President Luis de Guindos on Thursday. Things are a little more interesting out of the UK; Bank of England Governor Andrew Bailey will be speaking on Wednesday and then a batch of hard data for December will be released on Friday, including Industrial and Manufacturing Production and GDP (which includes also the preliminary estimate for Q4 GDP).

In terms of fundamental developments worth noting on Monday and from over the weekend, starting with the UK; reports suggest that the UK might allow pubs and restaurants to reopen as early as April if they agree not to sell alcohol, although this is just one of a number of options under discussion with regards to a potential relaxation of restrictions after Easter.

In terms of vaccines, there were conflicting reports regarding the timescale over which most UK adults could have received a vaccine by; one report suggested most of the adult population could have received their first jab by the end of May, whilst another said the end of June was a more likely target. Separate reports alleged that the UK government is thinking about targeted Covid-19 vaccine passports which would permit those who have been vaccinated to return to a more normal daily life, though these reports were denied by the government.

What really matters here is the fact that it appears that, out of the major developed market economies, the UK seems likely to be the first to reach something resembling herd immunity, or at least where a substantial proportion of the population has been vaccinated. This notion, combined with last week’s less dovish than expected BoE, has helped GBP outperform its peers as of late.

Finally, in UK fiscal news, the Times on Sunday reports that UK Finance Minister Rishi Sunak is to set to extend the furlough scheme and business support measures in the budget scheduled to be released on 3 March. The report alleges that Amazon and other companies that have benefitted from the pandemic might face a “double tax raid” in order to bolster the UK government’s finances. As long as markets do not begin to worry about the long-term viability of the UK finances, this news ought to be a GBP positive, given that the extension of the furlough scheme will keep a lid on rising unemployment.

Turning to European news; former ECB President Mario Draghi looks set to become the next Italian PM, after the League and Five Star Movement parties both signalled over the weekend that they could support a government with Draghi at the helm. Draghi is now expected to inform Italian President Sergio Mattarella in the coming days that he no longer has reservations about assuming the role of Prime Minister. This news has been greeted positively by Italian financial markets (the FTSE MIB was a European outperformer on Monday, up 1.5% on the day), but does not seem to have aided EUR too much.

European data was otherwise somewhat downbeat, but did not seem to impact the euro too much; German Industrial Production showed no MoM growth in December over November output levels, while Spanish Industrial Production dropped 0.6% on the month. Capital Economics “suspect that output will have fallen slightly since then as virus containment measures continued to take a toll and supply chain difficulties affected production in the auto sector.” Eurozone Sentix Investor Confidence data for February was also a little softer than expected, coming in at -0.2 versus expectations for a rise to 1.9 from 1.3 in January.

Elsewhere, ECB speak has for the most part been ignored amid a lack of any new insight from policymakers regarding the future direction of the central bank’s policy. For reference though, here is a recap of what was said and by whom; ECB President Christine Lagarde has been on the wires and expects inflation to rise over the coming months, though to remain subdued in the long-run and reiterated her stance on the ongoing necessity for the ECB’s highly accommodative monetary policy stance.

Elsewhere, ECB Governing Council Member Oli Rehn was also downbeat on the prospect for long-term inflation, saying the pandemic is likely to weigh on inflation for years to come, before adding that the bank should let inflation overshoot its “close to but just below 2%” target. Finally, ECB Governing Council Member Ignazio Visco said the ECB expects economic output to increase in the Spring despite fears that the pandemic will continue to weigh on consumer spending.