EUR/GBP rises back towards 91.00 as sterling slides

• EUR/GBP saw strength heading into the 4pm London fix, rising towards 0.9100.
• Brexit deal disappointment and Covid-19 concerns seem to be weighing on sterling.

EUR/GBP has been on the front foot in recent trade amid a combination of EUR strength and GBP weakness ahead of the 4pm London fix. No specific catalysts are behind EUR strength, though a few fundamental factors can be pointed to in order to explain GBP weakness (more below). Month, quarter and year-end rebalancing is likely to be a factor in EUR/GBP this week, which could add to volatility at a time when market depth is already low, with many market participants still away for Christmas and New Year celebrations. At present, the pair trades in the 0.9080s, up just under 100 pips or just over 1.0% on the day.

Sterling’s struggles…

A few factors are likely to be behind sterling’s ongoing struggles on Monday. For starters, a continuation of the “sell the fact” reaction that was seen in wake of last Thursday’s Brexit deal, which was very much expected, seems in play. Andreas Steno Larsen, global chief FX and rates strategist at Nordea in Copenhagen argues that “this is markets slowly but surely acknowledging that this is not an optimal deal for the UK”. On the deal itself, Larsen continued that “this is rather a very slim deal that merely avoids the cliff-edge but there are still large gaps that will have to be dealt with in 2021 and frictionless trade is not secured”.

Covid-19 concerns are also likely weighing; new UK Covid-19 infection numbers were just out, with over 40K cases reported on Sunday, while just over 300 deaths were recorded. Politico reported that the Scientific Advisory Group for Emergencies (SAGE) is advising the UK PM Boris Johnson that he will have o keep secondary schools closed in January and might even have to resort to a stricter lockdown than that of the one back in November to prevent the virus “spiraling out of control”.

More positively, reports suggest that the AstraZeneca/Oxford University Covid-19 vaccine could be approved in the UK within days, which would enable a significant ramping up of the country’s Covid-19 vaccination programme which is already significantly ahead of the EU’s, which only started over the weekend. UK Cabinet Minister Michael Gove said that if the rollout of the vaccine goes to plan, “then we will be able to progressively lift some of the restrictions, which have made life so difficult for so many”.