EUR/GBP dips below 0.8500, but last week’s low, 50DMA proving solid support

• EUR/GBP is trading just under 0.8500 where it is finding support in the form of last week’s lows and the 50DMA.
• The pair has been weighed this week by improving risk appetite but faces high BoE and ECB policy uncertainty.

EUR/GBP is currently trading marginally lower on the session slightly to the south of the 0.8500 level, though support in the form of last week’s low at 0.8490 and the 50-day moving average at 0.8485 is keeping a floor under the price action for now. Risk appetite has been improving since the start of the week which generally favours the comparatively risk-sensitive GBP versus the euro. This has helped the pair reverse back under 0.8500 from this week’s opening levels near 0.8550.

Eurozone data

Eurozone data largely did not impact FX market sentiment on Thursday. German Industrial Production saw a much bigger than expected 2.8% bounce in October, though analysts warned that supply chain disruptions would continue to hamper the recovery in output in the months ahead. The December German ZEW survey was mixed, with current conditions (amid lockdowns) posting a surprise drop into negative territory versus overall economic sentiment posting a smaller than expected drop. Finally, the final estimates of Eurozone GDP growth and employment change in Q3 were left unchanged at 2.2% and 0.9% QoQ respectively.

Central bank uncertainty

Seeing EUR/GBP stall at resistance in the 0.8500 area is not to surprising given the current environment of uncertainty regarding ECB and BoE policy in the coming months. With regards to the Bank of England, the more cautious tone from policymakers on the risks posed by the Omicron outbreak has resulted in money markets pricing out a rate hike later this month. But traders, many of whom were wrong-footed when the bank opted to go against market expectations and not hike rates by 15bps last month, will be wary that another BoE surprise might be in store. Policymakers have unanimously signaled that rates will need to begin gradually rising in the coming months – it is just a question of when.

Meanwhile, ECB policymakers seem in two minds about what to do with the bank’s pre-pandemic Asset Purchase Programme when the PEPP expires in March. Prior orthodoxy had been that the APP would be bumped higher to make up for the ending of the PEPP next March. But amid high inflation and load calls from hawkish governing council members, ECB members seem to now be leaning towards leaving the APP unchanged.

Ahead

In terms of the rest of the week, euro traders will be on notice for a barrage of ECB speak on Wednesday and Friday, but there is otherwise not any further important data releases for the region. Sterling traders, meanwhile, will be keeping an eye on October's monthly GDP and economic activity numbers out on Friday.