EUR/GBP’s sharp rally continues, pair now flirting with 50DMA in 0.8640s

• EUR/GBP’s sharp rally has continued for a second day, with the pair now flirting with its 50DMA in the 0.8640s.
• EUR/GBP is now on for its best week since early September 2020 and is up roughly 1.8%.

EUR/GBP has continued to correct sharply to the upside on Wednesday and managed to post highs at its highest level in over a month above the 0.8650 handle and above its 50-day moving average at 0.8647. The pair has since pulled back a little from extremes and is trading in the 0.8640s. On the day, EUR/GBP is up another 0.7% or over 60 pips. On the week, the pair is now up roughly 0.8% or over 150 pips. That means the exchange rate is set for its best week since early September 2020, a week when sterling was rocked by no-deal Brexit fears.

Driving the day

In contrast to early September, when the UK government’s decision to introduce legislation that would break the EU Withdrawal Agreement signed back in October 2019 sent fears of a no-deal end to the UK/EU transition period into overdrive, there is very little by way of fundamental explanation for recent gains in EUR/GBP. The overarching picture of a UK economy that is getting the virus under control, racing ahead with its vaccine rollout and heading towards a swift economic reopening versus an EU that is struggling to contain the third wave of infections, is behind with its vaccine rollout and is likely to remain in lockdown for some time is still very much true. This, the long-term EUR/GBP bears continue to argue, remains a long-term negative for the pair.

Thus, market commentators are chalking this week’s sharp rally up to a technical correction/profit-taking/position adjustment in wake of a prolonged sell-off in the pair. Indeed, between the start of the year and this Monday (when the pair hit multi-month lows under 0.8450), EUR/GBP had dropped around 5.5%. Following the recent retracement higher, the drop since the start of the year is still around 3.5%. Some market strategists have been arguing that relatively higher levels of positivity regarding the UK’s near-term economic outlook versus that of the EU’s is now “in the price” and has been for some time, something which recent price action suggests likely is the case. If EUR/GBP is to continue to head lower, more UK good news and more EU bad news are likely going to be needed.