EUR/GBP rangebound around 0.8900 ahead of key events this week

EUR/GBP continues to trade within recent 0.8880-0.8920ish ranges, where it has spent most of the past four trading days. Traders are assessing whether the increasingly more favourable relative economic outlook for the UK versus the Eurozone on account of the former’s superior mass vaccination progress warrants a further push to the downside and beyond the key area of support just above the 0.8850 mark that has help firm since last May.

News Update

The UK is coming out of the worst part of the pandemic so far, after deaths frequently surpassing 1K per day last week. New infections now having dropped substantially WoW (indicating that the lockdowns are to some extent working to bring transmission down) and were down to 37.5K on Monday, while daily deaths dropped to 599 having been frequently above 1K last week.

The rhetoric from officials has been a little more upbeat; UK PM Boris Johnson spoke on Friday of early signs that the pressure may be slightly easing in London hospitals and said on Monday that the government will review lockdown measures on the 15th of February, although he does not think things will be substantially different before spring. The UK is hoping to have vaccinated all over 50s and other vulnerable groups by then, with the country’s vaccination progress still significantly outstripping that of most other major developed economies.

Meanwhile, in terms of fiscal news; the UK Chancellor of the Exchequer Rishi Sunak has reportedly drawn up plans to make one-off £500 payments to almost 6M people in the UK in an attempt to ward off a backbencher revolt over government plans to end the emergency increase to benefits implemented in the first stages of the Covid-19 crisis.

Looking across the English Channel; EUR remains mostly unfazed by Italian politics. Italian PM Conte is pushing to save his government, asking lawmakers on Monday for their “clear backing” to overcome a political crisis right in the midst of the Covid-19 pandemic. Lawmakers in the lower house will participate in a confidence vote on the PM later before the vote moves to the Senate on Tuesday.

Otherwise, it has been a quiet day. EUR/GBP is likely to take much more impetus from key events later in the week…

Key events this week

The main event for EUR trader this week will be January flash PMIs, released on Friday. SEB comment that “sentiment surprised on the upside in December despite being the new restrictions that was introduced due to the rising spread of Covid-19” and that “both services and manufacturing rose but there is still a clear sector divergence and a split picture also within the service sector.” Manufacturing sentiment continues to be strong with Germany in a clear lead among the major 4 economies, the bank notes. Meanwhile, with regards to the service sector, “as restrictions have been strengthened and extended, additional weakness is expected in the near term but compared to last spring the decline will be relatively modest”.

Thursday’s ECB monetary policy decision will also be a key moment to watch for EUR traders; “in our view,” says Danske Bank, “the ECB meeting next week is set to be a fairly uneventful one, which we largely expect to be a stock-taking meeting with no new policy signals”. The bank continues that “as the Euro area economy is still in lockdown and could be all through Q1, it is likely the services sector will continue to drag economic sentiment lower but with the rollout of the vaccines and improvement in the weather conditions, we believe economic activity is set to pick up… (and) the press conference (will) convey this ray of optimism”. The recent recalibration of the policy instruments from the ECB in December has been well absorbed by markets, observes the bank, concluding that this means the ECB has no urgency to signal a new policy stance.

Elsewhere, another factor that ought to be on the radar of any EUR trader; Eurozone leaders will also be meeting this week. EU27 finance ministers will be meeting to discuss progress in the bloc’s economic response to the Covid-19 pandemic on Tuesday and EU27 leaders will convene on Thursday to discuss a broader range of topics including the pandemic, the bloc’s vaccination drive and a host of geopolitical issues (including the bloc’s response to the recent arrest of Russian opposition leader Navalny open his return to Moscow).

Turning to GBP, traders will be on notice for a speech from the Bank of England’s Chief Economist Andy Haldane on Tuesday, December inflation numbers on Wednesday and December retail sales and flash PMIs on Friday. On the latter, “last month’s data saw rises in all measures although services stayed below the 50 level that signals expansion” notes Lloyds Bank, who think that the services reading is likely to be down in January given the further tightening in restrictions but possibly by less than is generally expected. “We forecast a fall to 48.5 from 49.4 in December,” says the bank, before continuing that “last month’s manufacturing number seemed to have been boosted by preparations for post-Brexit disruptions and so we also expect a modest fall this month to 56.0”.

Key EUR/GBP levels