EUR/GBP tumbles on hopes for a soft Brexit and a drop in German bond yields

• The GBP is boosted by hopes of a soft Brexit.
• The EUR is under pressure on a slump in German/EU bond yields.

EUR/GBP is now trading around 0.8795 in the New York Session, sliding by 0.45% on a slump in German bond yields and hopes for a soft Brexit and muted EZ economic data on Friday. The benchmark 10Y German bund yield is now hovering around 0.659%, after falling by over 6% and well off the recent high of 0.808%. It is not only German bonds, but the 10Y US bond yield is also trading lower at around 2.884%, down by 1.12% and significantly below the recent panic high of 2.957%.

The slump in the US, as well as German and EU bund yields, may be triggered by some comments by US policymakers, downplaying the US inflation pressure despite an upbeat wage growth. On Thursday, US Treasury Secretary Mnuchin said Trump administration’s policies will raise US wages without causing broader inflation.

As par Mnuchin, “There are a lot of ways to have the economy grow; you can have wage inflation and not necessarily have inflation concerns in general”. A similar view was also echoed by White House economic advisor, that projected a Goldilocks US economy as it could grow by 3% in 2018 without boosting inflation much.

Overall, EU economic data was muted on Friday. EZ core CPI for January came as -1.7% vs 0.5% prior (M/M); On Y/Y basis it came as 1% vs estimate of 1%; prior: 0.9%. Although EZ core CPI ticked up in January despite a stronger EUR, negative for imported inflation, it is still way below ECB’s elusive target of 2%.

German GDP for Q4 came at 0.6% vs an estimate 0.6%; prior: 0.8% (Q/Q). On a Y/Y basis, it remained unchanged at 2.3% vs estimate/prior: 2.3%. GDP fine prints show that private consumption was tepid, while government capex gave some support.

Overall, there was little impact of these muted CPI & GDP on EUR as the market is almost convinced that the ECB will not change any monetary policy or QE tapering until Sep’18, irrespective of any economic data.

On the other side, the GBP is boosted on hopes of a soft Brexit as UK Prime Minister Theresa May won the backing of her divided Brexit “war cabinet” to ask for an ambitious trade deal with the EU after a marathon eight-hour meeting at her country house, although the EU may reject it. The EU is set to oppose turning Theresa May’s pledge to avoid a border in the Irish Sea after Brexit into a legal guarantee.

In another Brexit development, the UK may allow EU citizens who arrive during the Brexit transition period to stay permanently.

Apart from politics, GBP may be also affected by comments from BOE's Ramsden, who said that weak UK productivity remains a key consideration of monetary policy.

Technically, as par Fibonacci pattern, EURGBP now has to sustain over 0.8875 for a further rally towards 0.8929-0.8996 and 0.9082; otherwise, sustaining below 0.8830 it may again fall towards 0.8805-0.8775 and 0.8730-0.8680 price zone in the coming days.