EUR/GBP drifting to the upside as sterling loses speculative bid, targets set back on 0.88 handle

• EUR/GBP has moved into a consolidation of the post-UK GDP rally and lingers around the highs of the day. 
• EUR/GBP rallied on Monday from a low of 0.8745 to a high of 0.8776 and is currently trading at 0.8769.

EUR/GBP has started to make a recovery in late January and penetrated the 0.88 handle last week, rejected in the 0.8820s. The pound had picked up a bid following the BoE, despite

the Bank of England’s February Inflation report that clearly signalled no urgency to raise rates. At the same time, the 2019 growth forecast was cut sharply due to mounting concerns about Brexit plus the wider global outlook. 

Markets were more encouraged due to last week’s BoE policy statement that said, “An ongoing tightening of monetary policy over the forecast period, at a gradual pace and to a limited extent, would be appropriate to return inflation sustainably to the 2% target at a conventional horizon”. 

However, the market has been given a wake-up call. This morning’s releases of weak December and Q4 UK GDP provides stark proof of the headwinds that have been blowing across the UK economy," analysts at Rabobank explained.

"In the final three month of last year, the UK grew by just 0.2% q/q, well below the pace of 0.6% that was registered in the previous 3 months. In addition, the releases of far weaker than expected December production and construction data highlight the risk that forecasters may not yet be fully prepared for the sharpness of the slowdown."

On the other hand, the euro is making fresh lows for the year and to the lowest levels since December printed a double bottom. The bets have been pulled with respect to the ECB seen pushing back the requirement of the tighter monetary policy. However, the US dollar is a major question in the markets and with Fed rate hikes likely kicking in at a time when fiscal stimulus is pulled, the euro may find some solace yet. 

GBP rally would likely be dampened by continued political wrangling...

"It remains our central view that a deal will be stuck between the UK and the EU pushing a hard Brexit off the table. During the ensuing transition phase that would follow a soft Brexit, negotiations would then turn towards the future trade relationship.  This implies that any initial GBP rally would likely be dampened by continued political wrangling.  On this scenario, we would expect EUR/GBP to settle down in the 0.85 to 0.87 area in the coming months.  On a hard Brexit, we would expect EUR/GBP to spike up towards parity," analysts at Rabobank argued. 

EUR/GBP levels

Meanwhile, EUR/GBP’s correction higher last week started to falter around the 38.2% retracement at .8810 and analysts at Commerzbank said that they are unable to rule out gains to 0.8840/90 where we look for signs of failure:

"We have minor support at 0.8723 and this guards the 0.8620/18 lows. Failure at 0.8620/18 would suggest ongoing weakness to the base of the channel at 0.8545 and potentially the 200 week ma at 0.8357. The market stays directly offered below the 200 day ma at 0.8863, and only above here allows for a move to the 55 day ma at 0.8892 and this, together with the October 0.8941 high, are expected to contain the topside."