EUR/GBP hits two-week highs but fails to hold above 0.8400 amid elevated European economic uncertainty

EUR/GBP hit its highest level in two weeks on Friday, at one point rallying to the north of the 0.8400 level in choppy post-US open trade, though the pair has since swung lower into the 0.8380s again. Friday’s move is consequential insofar as the pair has broken to the north of a 0.8310-0.8380ish range that had prevailed for the rest of the week up until now. But failure to push above resistance in the 0.8400 area and manage a clean break beyond suggests that a more sustained rebound towards monthly highs near 0.8480 isnt really on the cards just yet.

EUR/GBP’s rangebound conditions in recent days stand in sharp contrast to many other FX pairs/asset classes which have seen very high volatility as a result of Russia’s invasion of Ukraine on Thursday. Traders have struggled to determine whether recent developments are bullish or bearish for the pair. Does the damaging impact on global risk appetite favour a higher EUR/GBP because sterling is more risk-sensitive? Or does the EU’s vulnerability to disruptions in Russian energy imports suggests a weaker EUR/GBP given higher risk premia priced into the euro?

Meanwhile, traders are also questioning how recent events might shape the outlook for BoE/ECB policy divergence. The BoE, though continuing to lift interest rates back towards pre-pandemic levels, has sounded more dovish recently about the prospect for long-term tightening. Uncertainty due to war in Ukraine will likely dampen GDP growth this year and further dampen the prospect for long-term tightening. But the same can be said for the Eurozone and the ECB, despite high inflation, might be inclined to stick to its current QE taper plans and push any rate hikes back to 2023.