GBP/USD hits fresh session lows, eyes test of 1.3650 as euro slides

• Cable currently trades at lows of the day in the 1.3650s.
• GBP/USD is being dragged lower by weakness in the euro on Monday.

GBP/USD is being dragged lower by weakness in the euro on Monday. Versus the US dollar, sterling and the euro have a positive correlation, which is unsurprisingly really given that geographical proximity and trade interdependence of the UK and EU (i.e. economic weakness in one seeps into the other).

Cable currently trades at lows of the day in the 1.3650s and EUR/USD continues to press lower, having only very briefly managed to surpass the 1.3700 level during the early part of the European morning. At present, the pair trades lower by about 0.1% or just over 15 pips on the day, but if the current downtrend in EUR/USD persists, the pair is likely to drop further.

Why the Euro is underperforming

There hasn’t been much for EUR traders to cheers over the weekend/on Monday;

1) French President Emmanuel Macron could announce a new national lockdown in France as soon as Wednesday night, to start before the end of the week and last at least three weeks, reported Journal du Dimanche. French government minister Beaune was asked about a possible lockdown this morning but said nothing has been decided yet, which seems to be the official government stance right now. Bloomberg cites French scientists as warning that infections driven by the UK variant will probably surge in the country in coming weeks.

2) Anxiety is growing in Brussels over the blocks sluggish vaccination drive when compared to key competitors; the UK has administered more than 10 doses per 100 people, the US just over six per 100 and the EU under two doses per 100, according to FT data.

3) Last Friday, AstraZeneca informed the EU that it would be cutting deliveries to the bloc by 60% in Q1, to just 31M doses. The vaccine maker said it was unable to forecast Q2 deliveries and blamed the drop in deliveries on problems in its Belgium factory. This came about a week after Pfizer delayed a large portion of its planned deliveries to the bloc.

4) Concerns over political instability in Italy; it is looking more and more likely that Italian PM Giuseppe Conte will resign from his post in a bid to form another coalition government that would have the ability to pass the necessary legislation in the coming weeks/months. Conte is also said to increasingly like the idea of an early election given his strong standing in the polls.

UK News

GBP’s focus has for now been much more on downbeat euro price action as opposed to on UK news. In fact, UK news has been much more positive; 1) Moderna said that its vaccine is effective against the UK strain of Covid-19 (though might be less effective against the South African strain), 2) UK PM Johnson was talking about potentially easing lockdown as early as mid-February (although whether the government will go through with this remains to be seen and risks seem tilted towards a longer lockdown).

Here is the bad news from the weekend; 1) UK PM Boris Johnson said last Friday that the new strain looks to be 30% deadlier as well as more transmissible than the original, rising the scope for tougher/longer lockdowns, 2) Johnson is set to approve a border crackdown on people entering the country and 3) the UK government is reported to have quietly extended lockdown laws until 17 July 2021, meaning there is scope for lockdowns to continue until then.

Pandemic aside much was made in the UK press regarding the Scottish First Minister Nicola Sturgeon vowing to seek to hold another independence referendum if she wins elections in May. SNP members have been discussing “alternative routes” to a referendum if Prime Minister Boris Johnson refuses and would seek to pass a bill to organise such a vote if there is another pro-independence majority in the Scottish parliament after May’s elections. This does not seem to have weighed on GBP too badly.

GBP/USD key levels