EUR/GBP flatlines in 0.8550 area, currently testing key level of support

• EUR/GBP has spent the majority of Friday’s session within a thin 0.8530-0.8550 range, though the pair is testing key support.
• Weaker than expected UK GDP numbers for October did not provide any lasting impetus.

EUR/GBP has had a subdued session on Friday, spending the majority of the session moving sideways within a 0.8530-0.8550ish range. In recent trade, it has pushed to fresh session highs just above 0.8550 but is only up about 0.1% on the day.

Weaker than expected UK GDP numbers (the economy grew just 0.1% MoM in October versus forecasts for 0.4% growth) did not provide the pair with any notable impetus. Still, analysts assess the data as likely further dampening expectations that the BoE will kick off its rate hiking cycle next week. According to Reuters, money market futures were now pricing in a 38% probability of a 15bps rate hike next week during the European morning, compared with 46% on Wednesday and nearly 70% at the start of last week.

Analysts had already been tweaking their BoE calls in wake of a dovish shift in the tone of policymakers, who have indicated they may prefer a more patient approach when it comes to raising rates in light of Omicron uncertainty. The government’s reaction to Omicron (increased curbs on the economy) will weigh on the economy and likely be noted as a downside risk by the bank. According to Commerzbank, “recent developments surrounding Omicron are now even causing doubts about a hike in February”. “If the market believes that a rate hike is only being postponed to February,” the bank continued, “sterling is unlikely to come under severe depreciation pressure… (but) if the BoE gives reasons to doubt this, sterling might depreciate further.”

EUR/GBP continues to probe a key area of support in the form of a downtrend that had been acting as resistance for much of the last three months but is now acting as support. To recap, EUR/GBP broke above this long-term downtrend on Wednesday in wake of rumours about the UK government’s impending announcement of a toughening of Covid-19 curbs. However, traders did not have the conviction to send the pair convincingly beyond early November highs in the 0.8590s, nor to meaningfully challenge the 0.8600 level, and thus selling pressure pushed the pair back under 0.8550 on Thursday, where it has traded ever since.