EUR/GBP hangs in balance of COVID-19 and Brexit, EZ calls UK to extend withdrawal agreement

• EUR/GBP consolidates as markets weigh Brexit, eurozone politics and COVID-19 impact.  
•  Upside limited by the resistance area at 0.94/0.93 and the downside constrained by the support area around 0.83."

EUR/GBP is trading at 0.8907, -0.29% at the time of writing, trading between a low of 0.8865 and 0.8987 while in the recovery of the lowest level since 13th March. The cross completes a 50% mean reversion of the late Feb rally as GBP sits-up within its COVID-19 sickbed in the recovery of its own bell-curve peaks. 

Despite the often sharp moves witnessed over the past few years, the price action in EUR/GBP fits into a sideways trend, although EUR/GBP has suffered an extension of the retracement into month-end. Markets take a breather from a highly volatile phase with the VIX -11% and stocks higher at the start of the week, eroding Friday's bearish closing ranges. The hardest-hit has had the most ground to recover, although, the eurozone has a great number of political and economic difficulties ahead which is recognised as a bearish prospect for the euro going forward, a currency that had gotten away with the pandemic relative lightly in comparison to the pound. 

"Now, recessionary conditions will be intensified by supply shortages resulting from the closing of borders by several countries in Europe," analysts at Rabobank explained, arguing that "this could highlight nationalist sentiments as could the discussion about sharing the burden of debt. The coherence of Eurozone politics could be an important driver of the EUR in the months ahead. That said, fundamentals have also taken a big hit everywhere else."

The ball is now clearly in the British court

Of course, the UK is also going to be under a lot of strain both politically and economically, pertaining to trade as well as the COVID-19 epidemic. Brexit is coming back to the fore as Europeans call for an extension to the Brexit transition period considering how coronavirus plays havoc with the timetable for an EU-UK deal. 

Under the withdrawal agreement, the Brexit transition period ends on 31 December 2020, although, it can be extended for one or two years if both sides agree by 1 July. However, the British government continues to rule that out – a UK government spokesperson said: “The transition period ends on 31 December 2020, as enshrined in UK law, which the prime minister has made clear he has no intention of changing.”  The Prime Minister’s official spokesman said: “The transition period ends on December 31 2020. This is enshrined in UK law.”

EUR/GBP levels

"Any extension of the Brexit transition phase is likely to be welcomed by investors insofar this would be seen as avoided further blockades at borders into next year," analysts at Rabobank suggested, currently expecting EUR/GBP to be trading in the 0.86 area at the end of the year:

• "The upside has been limited by the resistance area at 0.94/0.93 and the downside has been constrained by the support area around 0.83. EUR/GBP may require a strong catalyst to break in other directions that would mark the beginning of a new trend."
• "The price action on the monthly chart implies that the bias is skewed in favour of a break higher towards the all-time high at 0.98029 as EUR/GBP has been trading over the past few months above the pivot around 0.83. Gains have been capped by the long-term downside trendline and the resistance area marked on the daily chart that form a very strong barrier for the EUR bulls."