EUR/GBP stabilises around the 0.8700 mark as choppy week draws to a close

EUR/GBP is consolidating around the 0.8700 level, with sellers having come in ahead of the pair’s 21-day moving average, which currently resides at 0.87316, earlier in the session. Having come within pips of its 21-DMA, that marks the closest the pair has been to this indicator of momentum since the first trading week of the year.

Recent volatility in the pair, which has seen it swing between multi-month lows under 0.8540 as recently as Tuesday before reversing over 150 pips to current levels appears, for the most part, unrelated to fundamental/macro developments and is more likely a result of recent machinations in global bond markets. If bond market moves calm down (a big if), then FX markets may again revert to trading on fundamentals which still appear to largely favour the GBP over the euro, given the UK’s comparatively better position with regards to the pandemic (falling infection rates in the UK and a much faster vaccine rollout setting the stage for a rapid economic reopening before summer, while European countries continue to consider tougher lockdowns).

Driving the day

The German Import Price Index data release for January showed import prices growing at a stronger than expected rate in January, though prices are still down on a YoY basis. Meanwhile, flash Consumer Price Inflation numbers out of Spain and France, released around the time of the start of European trade, were soft, with MoM CPI dropping in both countries. Euro has ignored the data, however, with a much greater focus on what has been happening in bond markets.

European government bond yields are pulling back on Friday in tandem with their US counterparts, with French 10-year borrowing costs now back in negative territory in nominal terms. More jawboning from ECB members is likely also helping push bond yields back down again; ECB Governing Council Member Isabel Schnabel reiterated the line of other key ECB officials earlier in the week by saying that changes in nominal rates need to be closely monitored, although she did say that if the rise in nominal yields is as a result of inflation expectations, this would be a welcome sign (but in the EU, the rise in nominal yields is most NOT due to rising inflation expectations).

Turning to UK related fundamental developments, things have mostly revolved around the Bank of England; Chief Economist Andy Haldane was out with some quite hawkish comments, saying that there is a tangible risk that inflation proves more difficult to tame than expected and requires monetary policymakers to act more assertively than what is currently priced into financial markets. These hawkish remarks do not seem to have changed the dial much for GBP, given Haldane’s hawkish credentials.

By contrast, Bank of England Deputy Governor Dave Ramsden was much more dovish on inflation; he noted that UK inflation is still below 1%, a reflection of the fact that the economy is still being hit hard by the pandemic and said that though he expects inflation reach the BoE’s 2.0% target by 2022, he sees risks as tilted to the downside. As with Haldane’s comments, GBP did not show much of a reaction.

Elsewhere, the latest UK government estimate of the country Covid-19 reproduction rate shows the prevalence of the virus continues to drop in the country; the estimate for the nationwide R rate (reproduction rate: the number of people each infected person spreads the virus to on average) was left unchanged at 0.6-0.9. This data supports the argument for return to gradual GBP appreciation given optimism in the UK about falling Covid-19 infections, the vaccine rollout and reopening.