EUR/GBP this three week highs as risk-off market tone weighs on sterling

EUR/GBP hit its highest level in three weeks on Monday, reversing higher from an earlier dip towards the 0.8350 level to come within a whisker of hitting the 0.8390 mark. At current levels in the 0.8380s, the pair is trading with modest on-the-day gains of about 0.1%. Traders have attributed upside as a function of the generalised risk-off tone to broader macro trade. Markets worry that a Russian military incursion into Ukraine might be imminent as Western powers move to remove diplomats from Kyiv and reinforce the NATO presence in neighbouring countries.

US and European equities trade lower as a result and in FX markets, risk-sensitive currencies (like GBP) are the worse performers. Mixed preliminary January PMI results out of both the UK and Eurozone doesn’t seem to have shifted the dial much for EUR/GBP. In the Eurozone, the manufacturing PMI was substantially better than forecast, while services was a little worse. In the UK, the PMIs were worse than forecast across the board, but IHS said that with inflationary pressures remaining elevated near record highs, the BoE remains odds on to hike interest rates again at next week’s meeting.

Meanwhile, FX strategists continue to view the uncertainty about UK PM Boris Johnson’s future in the top spot as not having much of an impact on sterling. Analysts at MUFG said “we do not expect heightened political uncertainty to materially impact pound performance given there is unlikely to be any near-term change in government policies”. Analysts at ING said “politics has yet to hit GBP on the view that even if PM Johnson were to resign, Chancellor Sunak would be seen as a safe pair of hands as an alternative”. Ahead this week, there isn't much by way of notable tier one data aside from Spanish, French and German flash Q4 GDP numbers of Friday.