EUR/GBP on course for fifth consecutive day in the red with sterling still in favour

• EUR/GBP is on course for a fifth day of losses and has fallen to around 0.8650.
• GBP continues to outperform amid falling Covid-19 cases and the UK’s fast vaccine rollout.

EUR/GBP losses have accelerated on Thursday; the pair, which closed below the 0.8700 level for the first time since May 2020 on Wednesday, rose back to momentarily touch 0.8700 during Thursday Asia Pacific trade. However, the arrival of European market participants saw the currency cross take a turn for the worse. EUR/GBP currently trades around the 0.8650 mark, having hit lows just above 0.8640. On the day, the pair trades with losses of about 0.2% or 20 pips and is on course for its fifth consecutive day off losses.

Looking at EUR/GBP from a technical perspective, the pair has broken below a key downtrend that had been acting as support for much of the past few weeks; as the pair fell below the 0.8660s this morning, it broke below a downtrend linking the 31 December 2020, 14, 20 and 21 January and 4 Februarys lows. Thus, though the pair has come a long way over the last few weeks (dropping more than 2% since the start of the month), there may be room for further acceleration to the downside.

Driving the session

No standout themes or news appear behind the price action on Thursday, though it seems that GBP continues to be a beneficiary of the vaccine trade, i.e. the notion that its world-leading vaccine rollout will facilitate a more aggressive economic recovery later in the year. GBP sits atop the G10 performance table on Thursday, up 0.6% versus the USD.

In terms of the latest news out of the UK; the Imperial College React study (which tests tens of thousands of people over the course of months at a time) shows that Covid-19 infections have dropped by around two-thirds since the start of the latest national lockdown. On average, the study found that on average 1.57% of people were infected with the virus in early-January, but this has dropped to just 0.51% as of mid-February. In London, the infection rate has dropped from 2.83% in early-January to 0.54%. The fact that lockdown has seemingly worked well should boost government confidence about its ability to rapidly begin to reopen its economy over the summer.

GBP has not been fazed too much by a downbeat survey from the Resolution Foundation, released on Thursday, which showed 2.6M UK employees expect to lose their jobs over the next three months. The survey will up the pressure on UK Finance Minister Rishi Sunak to implement another extension of the furlough scheme and BoE Deputy Governor Michael Saunders said that he would be placing a high weight on labour market outcomes. In other words, if things to take a significant turn for the worse in the UK jobs market, further easing is likely.

Turning to the euro; though suffering versus sterling, the single currency is actually performing quite well versus the majority of the rest of its G10 counterparts. This could be a reflection of the Draghi effect; Italian PM Mario Draghi's government coalition won a vote of confidence in the Senate on Wednesday, with lawmakers voting 262 vs 40 in favour of his new government. The Lower House is expected to also vote in favour and then Draghi can begin pressing ahead with his domestic agenda. Markets seem to have high hopes that Draghi will be able to breathe some life back into the Covid-19 stricken Italian economy, as well as aid further progression of the EU project.

Euro traders appear not too worried about concerning reports that AstraZeneca vaccines have been going to waste in Germany amid health care worker fears about its side effects. German health officials have been urging that the vaccine is safe for use, but mistrust of the vaccine (which has not been helped by recent AstraZeneca vaccine negative comments from various EU officials) may hamper the bloc’s already sluggish vaccine rollout.  

ECB minutes were largely ignored and did not contain any new information on policy. Note that the bank appears to have shifted emphasis towards maintaining ease financing conditions, rather than talking about its price stability mandate, perhaps in anticipation of higher but transitory inflation ahead. This tactic may be aimed at avoiding markets falling into the trap of thinking that the ECB is going to start tightening monetary conditions at the first sign of inflation going above its target.

Finally, the preliminary estimate of January Consumer Confidence in the Eurozone was just released, coming in a tad above expectations at -14.8 (consensus was for -15.0), but down from last month’s -13.9 reading. This is still well below pre-pandemic levels and Capital Economics thinks that “unless vaccine programmes accelerate to allow restrictions to be lifted soon, a sustained pick up in confidence remains months away”.