EUR/GBP consolidates below 0.8900 after hitting eight-month lows

EUR/GBP slumped to fresh eight-month lows beneath the 0.8850 mark in the early part of Wednesday’s European session, despite a lack of any notable fundamental catalysts to drive the move. Technical selling appeared to have been at play; since the end of last week, the pair had been consolidating within a pennant structure which, during early European trade, it broke to the south of. Since hitting lows around 0.8840, EUR/GBP has pared some of the day’s losses and now trades in the 0.8870s, down about 0.2% or just over 20 pips on the day.

Eurozone News

EUR was an underperformer in the G10 on Wednesday despite the positive news that Italian PM Giuseppe Conte managed to survive Tuesday’s vote of no confidence in the Italian Senate. As a reminder; the vote was triggered when the Viva Italia party left the government last week due to criticism on how the pandemic has been handled and on the use of the EU support funds that will be distributed starting this year. SEB notes that “as one of the country’s worst affected by the Covid-crises, a new political crisis was not wanted by a majority and the PM in the end managed to stay on”. The bank continues that “compared to other periods of political turbulence in the last 10+ years, the fact that we now have EU support in place and the ECB gobbling up government bonds, financial markets have this time taken a calmer approach to the development and the yield spread to Germany has stayed largely unchanged”.

Perhaps EUR underperformance is more of a reflection of lockdown concerns; German Chancellor Angela Merkel formally announced tougher restrictions on Tuesday evening (European time), while the PM of the Netherlands has introduced a new curfew to take effect from Friday, coupled with a ban on all non-Schengen area flights from 23 January.

UK News

December inflation numbers were released prior to the start of European equity trade and came in a little stronger than expected, perhaps contributing somewhat to early GBP strength versus its G10 peers. Headline inflation rose to 0.6% YoY (versus expectations for a rise to 0.5%). More strength in the YoY rate of inflation is expected in the coming months, with the rolling annual rate of inflation likely to reach 2% or above in March, though this is likely to be much more of a reflection of the negative price shock in the March 2020 lockdown as opposed to strong price growth in March 2021.

Meanwhile, the UK ONS House Price Index for November rose at an annual rate of 7.6% YoY, up from 5.4% the month prior, its fastest rate since 2016. Market commentators that the UK Government’s decision to reduce stamp duty is likely to be seen as a policy mistake in hindsight given that it helped pump demand for homes and make prices even more unaffordable for most.

Elsewhere, the latest Covid-19 numbers were released; new cases rose 38,905 on Wednesday, up slightly from Tuesday’s 33,355 rise, while deaths rose to another record 1,820 on the day. The number of people to have received their first vaccine rose to 4,609,740. The hope is that as the proportion of the most vulnerable members of the UK to have been vaccinated continues to rise and as the lockdown continues to take effect, the number of daily deaths should soon dip in line with the recent dip in new cases and hospitalisations.

Finally in UK news, Bank of England Governor Andrew Bailey has been on the wires and made some comments on the economy, but not on monetary policy; he noted that GDP was still about 10% lower in September than it was prior to the pandemic and this picture has been mixed since September amid the second wave, though November data showed the economic impact of lockdowns is diminishing.