EUR/GBP under pressure in weak euro environment, a blessing for troubled eurozone

• EUR/GBP is heavy and extending the downside for the start of the week.
• UK economy likely warrants a rate cut at some stage this year, with Brexit negotiations in the driving seat.
• EZ's landscape sees the ECB at the status quo, with weakness in the euro supporting the economy.

EUR/GBP remains on the back foot despite a disappointing result in the UK data today, on the whole. EUR/GBP is currently trading at 0.8435 between a rang of 0.8420 and 0.8458, -0.14% on the day so far.

While the data was pretty dismal, much of it should have been expected and there is no surprise element in the market, hence, a slightly sluggish greenback has enabled all boats to float and is probably buoying sterling which has already completed a 50% mean reversion of the October-mid Dec range vs the US dollar. 

In the UK data, we have seen that while the economy has avoided a contraction in the final quarter of last year, there has not been much improvement. There was a slight improvement in Gross Domestic Product MoM for December, but November was a shocker. There was a 0.5% contraction QoQ and the industrial sector as well as business investment is left wanting. 

"However, more recent economic figures have highlighted that after the conclusive election result in December business confidence improved," analysts at Rabobank point out.

"As a result, economists appear to be pencilling in a far better outcome for UK growth in the first- quarter (Q1). That said, with political uncertainty back on the agenda, the ability of the ‘Boris bounce’ to last much longer hangs in the balance."  

BoE rate cut expectations

Looking to the Bank of England, the markets are expecting a rate cut to come at some stage soon. We have heard one of the most dovish of the Monetary Policy Committee speaking today, Jonathan Haskel, who dissented at the last Bank of England meeting in favour of a rate cut. He argues that the current limited room on monetary policy means he continues to prefer to move now on rates – "the trend toward intangible assets reinforces low-interest-rate environment."

The Bank of England's governor, Mark Carney, is speaking before the House of Lords today who has expressed how interest rates are going to be relatively low for the foreseeable future, adding that "we should be providing some stimulus to bring UK economy back to trend rate of growth," which is dovish and should weigh on the pound.

There will be a watchful eye over the first few month's data to gauge what the next move will be by the Bank of England, and indeed, the EU/UK trade negotiations will be a major influence on GBP investors. 

"This morning’s reports that the EU will reject a demand from the UK to guarantee banks access to EU markets is likely to GBP investors wary," analysts at Rabobank expressed, noting that the admission from the Cabinet Office that a new ‘smart’ border between the UK and the UK will not be ready until 2025 is also a concern. "The implications is that extra paperwork and borders delays appear to be an inevitability from January."

ECB has limited scope to ease

As for the euro leg of the cross, one of the major lags of the eurozone economy has been on the manufacturing side. European industrial production data at the end of last year was woeful. The eurozone ended 2019 on a soft note, with growth decelerating to 0.1% quarter-on-quarter and the black swan of this year, the coronavirus, is not going to be helpful in the project's quest for growth-2020. 

More importantly, underlying inflation has fallen back to 1.1% from 1.3% in December, showing that the upward trend in core inflation remains muted. However, the ECB has extremely limited scope to ease, so exchange rate weakness is welcome in Frankfurt at the moment which is seeing the euro tip over the edge of the 1.09 handle to a fresh low of 1.0891 vs the US dollar. 

On a more positive note, services PMI for January were revised up from their initial estimate of 52.2 to 52.5, which brings it much closer to the December reading of 52.8. That takes away some of the concerns around negative spillovers from the manufacturing sector - a sector that seems to be bottoming out at the moment which leads to a somewhat more positive picture of the eurozone economy at the start of Q1.

EUR/GBP levels