EUR/GBP consolidates around 0.8650 mark as traders asses prospects for further losses

• EUR/GBP is consolidating close to session and weekly lows around the 0.8650 mark, where it sits flat on the week.
• The pair has been buffeted by Eurozone and UK PMI data on Friday.
• But focus is likely to return to the region’s diverging vaccine fortunes in the coming days.

EUR/GBP is consolidating close to session and weekly lows around the 0.8650 mark, where it sits flat on the week. The pair saw some strength early on in the European session amid a combination of better-than-expected EU flash manufacturing PMI numbers and dire UK retail sales data, which lifted the pair as high as the 0.8670s, but the move higher did not have legs and, since the arrival of US players in the market, the pair has slipped back to test Thursday’s lows of just above the 0.8640 mark. With the currency pair now having convincingly cleared the April 2020 low at 0.8670 to the downside, the door is open (technically speaking) to a run towards early 2020 lows of under the 0.8300 level, though such a move would require a further over 4% depreciation from current levels (note that EUR/GBP has depreciated just over 3% since the start of the year).

Eurozone, UK data

Strong Eurozone flash manufacturing PMI numbers for February appear to have saved the euro from incurring further losses versus the GBP on the final trading day of the week; Markit’s preliminary estimate of Manufacturing PMI came in at 57.7, well above expectations for a reading of 54.3. Germany saw particular strength in the manufacturing sector. Eurozone services PMI was broadly a disappointment, however, and has taken the edge off any upside the euro might otherwise have derived.

Whilst on the topic of PMIs, it is worth noting blowout UK PMI numbers for the same time period; the UK’s services sector is seemingly holding up much better than anticipated this month, with the flash Services PMI coming in at 49.7 versus expectations for 41.0. Manufacturing was also stronger than expected and was a decent amount above 50. Strong PMI numbers seem to have negated the negative impact on GBP that the horrendous UK Retail Sales report exerted earlier in the session. For reference, January Retail Sales were down 8.2% MoM, well above expectations for a drop of 2.5%. The YoY rate of Retail Sales growth was equally downbeat, coming in at -5.9% versus expectations for a growth rate of -1.3%. Elsewhere, markets paid less attention to promising GfK Consumer Sentiment numbers for February; the index rose to -23 (above consensus forecasts for -27), its highest level since March 2020, a sign that falling Covid-19 cases and the country’s rapid vaccine rollout is boosting confidence (just as it has boosted GBP!).

Pandemic trends

Though the move lower in the EUR/GBP currency cross is taking a breather on Friday, with the pair instead opting to consolidate around the 0.8650 mark as traders focus more on Eurozone and UK economic data, it is worth noting that Covid-19 trends in the UK and EU continue to diverge in a manner that may continue to prove negative for EUR/GBP.

In other words, the news coming out of the UK is largely positive; the UK government’s weekly estimate of the virus R rate has been revised lower again to 0.6-0.9 from 0.7-0.9, implying a daily growth rate -6% to -3% versus last week’s -5% to -2% infection growth rate. Meanwhile, the Telegraph disclosed some of the findings of a Public Health England study, which is set to formally be released later in the month, which has reportedly found the vaccines to reduce Covid-19 infections and transmission by two thirds and claims it is the first study in the world to use real-world data. Furthermore, evidence continues to mount that seems to vindicate the UK’s vaccination strategy (i.e. extending the time period between the first and second doses of the Pfizer vaccine to three month from the recommended one in order to get more people vaccinated with at least one dose); the Pfizer/BioNTech vaccine may soon get emergency use authority as a single dose.

All of the above implies that the UK will be able to reopen its economy and return to “normal” sooner rather than later. The same cannot be said in the EU, given the tone of recent news anyway; the German Head of the Public Health Agency was earlier on the wires saying that infections are stagnating at a level that is too high, implying tighter economic restrictions will be kept in place in the country for longer. Moreover, reports out of Italy suggest much of the country might soon be moved into the higher Covid-19 alert “orange” tier from the current “yellow” tier, amid concerns about rising contagion and the spread of Covid-19 variants; this would result in the closure of restaurants and bars.

So whilst things are looking brighter in the UK, with Covid-19 cases trending lower and the country’s world leading vaccine rollout now seeming to come into effect, the EU looks set to continue to struggle in the months ahead amid its lagging vaccine rollout and struggles to supress the spread of more transmissible Covid-19 variants. EUR/GBP remains vulnerable for further downside.