EUR/GBP consolidates around the 0.8750 mark, technicals looking bearish

• EUR/GBP has seen a modest recovery from early European session lows and is back above the 0.8750 mark.
• The pair continues to trade within the bands of a downwards trend channel, implying further losses in the coming weeks.

EUR/GBP has seen a modest recovery from early European session lows and is back above the 0.8750 mark, around which the pair has spent the last few hours consolidating. As a reminder, a less dovish than expected tone to Thursday’s Bank of England meeting with regards to the potential use of negative interest rates, the tapering of asset purchases and on the outlook for the economy saw the pair drop sharply from around the 0.8830s to current levels around 0.8850. Friday’s mild rebound appears to be nothing more than some position adjustment/a technical rebound.

Driving the day

Fundamental news flow has been fairly heavy on both sides of the English Channel, though nothing has shifted the narratives driving each currency substantially. Starting with the euro; the trajectory of the pandemic on the mainland still looks concerning. French health officials are reportedly pushing for the country to enter a third lockdown, something which political analysts argue French President Emmanuel Macron has been keen to avoid given the fact his popularity has already taken a hit amid the country’s sluggish vaccine rollout. Meanwhile, German authorities are reportedly mulling a lockdown extension for two weeks. EUR is, for now, unaffected by this news, but any further negative lockdown developments over the weekend could weigh on the single currency.

Elsewhere, the political situation in Italy continues to brighten; former ECB Chief Mario Draghi, who was recently given a mandate by Italian President Sergio Mattarella to form a government and become Prime Minister, has been holding consultations with the various Italian parties as he attempts to build a coalition. At this point, markets assign a strong possibility that he will be able to form a government (EUR positive). If he fails, elections are likely (EUR negative).

Meanwhile, various Eurozone countries have released various tier 2 data reports; most importantly, German Industrial Orders dropped more than expected in December (down 1.9% MoM versus forecasts for a 1.0% drop).

Turning to UK fundamental developments; Bank of England speakers have been out in force in wake of yesterday’s policy update. Chief Economist Andy Haldane took his usual upbeat tone, noting how the bank’s new forecasts show a strong recovery in GDP and inflation, though he did note trade disruptions as a result of Brexit and the uncertainties that this creates.

Deputy Governor Dave Ramsden stuck to the script on negative interest rates, saying that the bank is right to include them in its toolkit, but that does not mean it is thinking about using them anytime soon. Moreover, he noted that negative interest rates can have less desirable consequences depending on the state of the economy and financial system (not exactly a ringing endorsement!).

Elsewhere, Halifax data showed house prices cooling a little in January, which is expected as demand dies down ahead of the end of the government’s year-long stamp duty tax cat (which expires at the end of March).

With regards to the state of the pandemic in the UK; the government released new estimates of the virus’ reproduction rate, revising down the countrywide estimate from 0.7-1.1 to 0.7-1.0 (implying that the prevalence of the virus is dropping nationwide as each infected person on average infects less than one other person). London’s R rate was revised down to 0.6-0.8 from 0.6-0.9 last week and the prevalence of the virus in the capital is expected to be dropping at a pace of 4-8% per day.

Technicals still very bearish for EUR/GBP

EUR/GBP continues to trade within the bands of a downwards trend channel and found strong support at the lower end of this trend channel on Friday; when EUR/GBP dropping below 0.8750 on during the early European session on Friday, it hit the downtrend linking the 31 December, 14, 20 and 21 January lows. Technically speaking, its seems likely that EUR/GBP might now rebound towards 0.8800 again, a level around which there is strong resistance in the form of lows set earlier in the week and where it will also hit the upper bound of the downwards trend channel which links the descending highs from the back end January.

Overall, the technical picture looks bearish as long as the pair continues to trade within this trend channel, which seems to fit well with a bearish fundamental backdrop (faster comparative UK vaccination drive versus the EU coupled with the prospect of lockdown easing soon in the UK versus further tightening in the EU).

EUR/GBP four-hour chart