EUR/GBP: Bulls capped on dollar crossflows but downside limited on Brexit angst

• EUR/GBP is extending the downside since supply hit at the highs of 0.9032, taking the cross down to a current low of 0.8981.
• Sterling and the euro have collapsed as risk sentiment spikes, taking the greenback along for the ride.

EUR/GBP has been volatile, travelling between the 0.9060s and 0.8927, finding buyers there until the 0.9030s and hitting resistance into the North American market which now sees 0.90 the figure under pressure again to the downside. 

The cross is being driven through the crossflows of the greenback as investors get set for the nonfarm payrolls at the end of the week. In the meantime, risk appetite has returned a bid in the greenback and has hit the euro slightly harder than it has the pound. However, the current impasse in UK parliament is a factor to weigh on the pound this week ahead of the meaningful vote to be taken mid-month. However, it is unlikely that risk sentiment can be a sustainable factor in the cross flows considering the number of current themes driving the political and economic factors behind the flow.

"One always has to be careful in the first week of the year, when liquidity is not great, but if this sets the tone, then brace for impact!" analysts at Rabobank explained. "Indeed, there is no dearth of potential global risks this year and the sheer length of the lists suggests that at least some of those risks will likely materialise. So, wearing seatbelts is well-advised." 

Preparations for Brexitdisruptions

Analysts at TD Securities noted the most recent data from the UK economy which was December's Manufacturing PMI that surprised to the upside, rising about half a point to 54.2 (Nov was revised up as well):

"However, gains were driven by new orders and increased purchases of stocks, and firms said that this was driven by preparations for Brexitdisruptions. The Output component pointed to a slower pace of expansion than in November. This is likely a theme we'll see more of in the next few months as firms ramp up inventory accumulation as they fear disruptions around the end-March Brexit date, and while it may boost growth temporarily in the near-term, it will eventually need to unwind, dragging on growth later this year"

Looking ahead for the week, the main release this short week is the US employment report this Friday. Despite the partial US shutdown, release of this report should still be released on schedule, leaving markets to assess non-farm payrolls and earnings.

EUR/GBP levels

Analysts at Commerzbank noted that EUR/GBP’ s spike lower held over 0.8900 and the market held above the 0.8941 October high on a closing basis and for now we will assume an upside bias is maintained, although it does appear to have lost its upside impetus. "The recent move higher does look directional, although it has failed on its initial attempt at the .9101 August high. Above .9101 would target the top of the 2016-2018 channel at .9166. Below .8900 lies the 200 day ma at .8853."