EUR/GBP bears eye a break of 0.8330 to target weekly lows, 0.8280

• EUR/GBP bears are on the verge of a test of the critical weekly support area.
• Covid risks abate which is helping to keep GBP elevated.

EUR/GBP is on the verge of a downside extension as it takes on critical support in the lows of the day near 0.8335. The pair has fallen some 0.4% from a high of 0.8395 on the day so far. The pound, often regarded as a risk currency, has benefited from a risk-on environment at the start of the week as full markets return. 

Omricon variant risks abate

One of the main contributors to the risk-on mood, helping to keep stocks elevated around the world, is down to the improved sentiment surrounding covid-19 and the Omricon variant.  Early laboratory studies show the more transmissible variant replicates less efficiently once inside the lung tissue. Plus, will we need second boosters, and how to manage COVID at home.

In the UK specifically, no new measures are needed in Britain to fight the variant, which is "plainly milder" than earlier forms of the coronavirus, Prime Minister Boris Johnson said at the start of the week. This has given the pound a much-needed boost. 

"The way forward for the country as a whole is to continue with the path that we are on," he told broadcasters. "Of course, we will keep all measures under review, but the mixture of things that we are doing at the moment is I think the right one."

UK data mixed

meanwhile, Britain’s manufacturers have suffered a fall in export demand. The weight of Covid risks and lockdowns as well as the uncertainties surrounding Brexit are impacting. This was according to fresh data that shows supply chain disruption and staff shortages held back the economy in December.

IHS Markit and the Chartered Institute of Procurement and Supply (Cips) showed growth in UK factory output was limited last month. According to the survey of 650 manufacturers, a key measure of for the Bank of England for early warning signs from the economy, inflows of new work from overseas dropped for the fourth month in a row. Meanwhile, the Final December Manufacturing PMI came in at 57.9 vs. 57.6 preliminary.  Final services and composite PMIs will be reported Thursday as the next key gauge.  

''We may have to wait until January to get a cleaner read on the U.K. economy but we see headwinds ahead from Brexit (still!), energy shortages, and both fiscal and monetary tightening,'' analysts at Brown Brothers Harriman explained. 

Brexit saga continues

As for Brexit, Between January 4 and January 6, there are very important meetings to begin the legal process against the UK which is going to be a weight to the pound.

Moreover, the City AM reported today that ''many British businesses may “give up importing” as a result of new strict rules that came into force on Saturday, on 1 January, a former senior civil servant in charge of Brexit planning has warned.''

''Philip Rycroft, who was permanent secretary at the Department for Exiting the European Union (DExEU) between 2017 and 2019, said the changes that came into play on January 1 will cause 'teething problems, with some sectors hit harder than others.

With the introduction of new barriers to trade with the bloc, Rycroft said businesses may decide it 'is simply not worth the hassle'.''

Additionally, the row regarding fishing rights continues. This will now be likely be referred to a court, where a negative ruling could result in retaliatory measures such as tariffs. This will not go down well in the land of GBP forex as uncertainties will remain. ''While the matter appeared to have been somewhat settled with the issuance of additional fishing licenses to the EU, reports suggest French fishermen are still waiting for 73 of them to be handed out by the UK,'' analysts at Brown Brothers Harriman explained. 

EZ inflation data eyed

The biggest event for the eurozone will be the inflation readings. ''Like in Germany, both energy prices and re-weighting issues are likely to weigh on December's inflation figures,'' analysts at TD Securities explained.

''We think underlying core price momentum is a bit stronger than the consensus, though, yielding a stronger core inflation figure. For headline inflation, we expect a bigger drag from energy prices than the consensus.''

EUR/GBP technical analysis

Meanwhile, from a technical standpoint, the price is on the verge of a test of critical weekly support:

Things to note as per Reuters ''Buzz'' analysis:

• Seasonal pattern: EUR has only closed up in Jan 5 times in last 20-years;
• Cross could also complete a fifth consecutive bear week;
• Increasing bearish momentum and lower RSI readings confirming latest drop;
• Next significant support from 2020 and 2019, 0.8282 and 0.8278 respectively;
• Upside squeeze point a long way off at 0.8598;