EUR/GBP stabilises just below 0.8600 as BoE policymakers fail to rock the boat

• EUR/GBP has fallen again and is now under 0.8600 as GBP continues to benefit from vaccine/reopening optimism.
• BoE policymakers spoke before the UK Parliament Treasury Select Committee, but largely failed to rock the boat.

EUR/GBP was choppy amid thin volumes during Asia Pacific trade, seeing a sharp sell-off to set fresh multi-month lows under the 0.8550 mark despite a lack of any fundamental catalysts to drive the downside at the time. The pair has since recovered from lows, but has struggled to break meaningfully back above the 0.8600 level and is currently trading in the 0.8580s, down about 0.2% or just under 20 pips on the day.

Driving the day

GBP continues to confound analyst fears that it may have entered overbought territory and continues to march higher versus the euro. Sterling continues to benefit from reopening and fast vaccine rollout-related optimism. As of 23 February, the UK had given 27.3 out of every 100 of its adult citizens at least one vaccine. That compares to the comparatively sluggish Eurozone rollout; Germany has administered just 6.4 vaccines per 100 adults, Spain 6.8, Italy 6.1 and France 5.9.

It looks as though vaccines work; the average age of hospitalised Covid-19 patients in Israel has been plummeting as the elderly were prioritised in the country’s vaccine rollout and independent reports based on real-world data show the Pfizer and AstraZeneca vaccine significantly reduce the probability of transmission and hospitalisation. Thus, the UK stands in good stead to be able to confidently reopen its economy ahead of the European mainland. Meanwhile, compounding concerns about the EU’s sluggish vaccine rollout is news this morning that AstraZeneca, which already cut vaccine deliveries to the EU in Q1 by 60%, is to deliver less than 90M Covid-19 shots to the EU in Q2, at least 50% below its contract commitments.

BoE policymakers speaking at the UK parliament

Bank of England policy makers have been speaking before the Parliamentary Treasury Select Committee about the bank’s recently released Monetary Policy Report (MPR). For reference, in the latest MPR, the bank forecast a 4% drop in Q1 2021 GDP, but for full-year 2021 GDP to rise 5% (downgrade from 7.25%), then rise 7.25% in 2022 (upgrade from 5.0%), followed by a 1.25% rise in 2023 (unchanged). Meanwhile, the bank forecast that Consumer Price Inflation would be 2% in 2021, 2.25% in 2022, before dropping back to 2.0% in 2023.

BoE Monetary Policy Committee members spoke about some of the upside and downside risks to the economy. In terms of the latter; Governor Andrew Bailey expressed concern regarding potential financial stability risks if the EU tried to force institutions to localise some operations in the EU. Jonathon Haskell noted risks to do with increased corporate bankruptcies and highly transmissible Covid-19 variants. Meanwhile, Ben Broadbent noted the risk that unemployment rises once the government’s furlough scheme is withdrawn. Turning to the upside risks, Haskell noted that a faster than expected vaccine rollout presents upside risks.

While it is interesting to hear from the BoE as to the risks, they have their eyes on, policymaker’s comments to the Treasury Select Committee appear not to have shifted the dial for GBP at all, given that policymakers did not say much about policy. Right now, it appears likely that negative interest rates will only be implemented in the case of some of the aforementioned downside risks materialising, or if the post-Covdi-19 economic recovery disappoints the BoE’s expectations by a sufficiently wide margin.