EUR/GBP starts 2022 in subdued fashion near-0.8400 with UK markets shut

• EUR/GBP is subdued at the start of 2022 close to 0.8400 and close to 22-month lows with UK markets shut.
• EUR/GBP was unresponsive to Monday’s final Eurozone manufacturing PMI and awaits further UK/Eurozone PMI surveys and Eurozone inflation this week.

EUR/GBP is starting the year in subdued fashion and meandering within recent ranges close to the 0.8400 level, which is not all too surprising given markets in London (Europe’s busiest FX trading hub) are closed for a UK bank holiday. To the upside, technicians will be eying last Friday’s 0.8415ish highs are resistance and to the downside, last Friday’s near two-year lows in the 0.8360s will offer support.

Markets have broadly been in a risk-on mood for most of the last 10 or so trading sessions, reflective of expectations that the comparatively milder Omicron Covid-19 variant will not wreak lasting economic damage on the global economy. This has helped GBP, which is more risk-sensitive than the euro, thus weighing on EUR/GBP, helping the pair hit 22-month lows at the end of last week under 0.8400. EUR/GBP has also benefitted from BoE/ECB policy divergence and this may well remain the case in 2022 with a few more rate hikes expected from the former but not the latter, as well as some potential quantitative tightening.

Economic data

Final Eurozone Manufacturing PMI figures out this morning offered little surprises with the headline Eurozone aggregative index coming in as expected at 58.0 showing sentiment in the sector remains strongly robust. EUR/GBP has thus not seen any reaction. The survey highlighted factories taking advantage of easing supply chain issues and reportedly buying raw materials at a record pace. Manufacturers expressed optimism that supply chain snags will ease further in 2022 and order books remain full, indicating the potential for strong output growth ahead. Euro traders will be more focused on a trickle of flash December HICP inflation estimates, with France reporting on Tuesday, Italy on Wednesday and Germany on Thursday ahead of the release of the aggregative numbers on Friday.

Last week’s Spanish numbers suggest upside risks to expectations (aggregative Eurozone inflation is seen slipping to 4.7% YoY from 4.9% in November). Final Eurozone service PMI numbers are unlikely to shift the dial, just as the final manufacturing survey results did on Monday. In terms of UK data, final PMI surveys will also be out this week and maybe slightly more interesting; the rapid spread of Omicron in the UK in the latter half of December means there may be negative revisions which could portend a big drop in sentiment in January. Indeed, there is generally a view data that doesn’t cover the period of rapid Omicron spread (like this week’s US and Eurozone data) is a little “out-of-date”, with traders more focused on January numbers to guage the near-term economic damage.

Whilst hot Eurozone inflation could offer the euro some short-term support, expectations of a continued large BoE/ECB policy divergence limit any potential upside. EUR/GBP is likely to be sensitive this week to Omicron news as cases rise in the UK, Europe and elsewhere. Any lockdown chatter in the UK could hurt sterling and see EUR/GBP rebound.