EUR/GBP bulls are testing hourly resistance during daily consolidation, Brexit eyed

• EUR/GBP bulls are in charge at the start of the week.
• Bulls testing hourly resistance in a bearish market.
• UK politics are front and centre on a light data week. 

EUR/GBP is in the hands of the bulls during the New York session. At 0.8359 currently, the price is 0.27% higher on the day so far after travelling from a low of 0.8338 and reaching a high of 0.8361. The week ahead is relatively quiet as per the economic calendar so sentiment surrounding the central banks and European politics would be expected to be the main drivers. 

High up on the list of political themes is Brexit. Liz Truss, Secretary of State for Foreign, Commonwealth and Development Affairs of the United Kingdom, is entering "intense talks" with the EU to renegotiate the Northern Ireland Protocol, as hopes of a Brexit breakthrough loom.

The good news for sterling bulls is that Ms Truss has opted for a softer approach than her predecessor, Lord Frost, inviting Mr Sefcovic to resume talks. Both officials have agreed to hold further talks on January 24, with Ms Truss clarifying in a Tweet that their teams will be working hard to deliver.

"Practical solutions to protect the Belfast Good Friday Agreement and political stability, ensure free flow of goods between the UK and Northern Ireland, and to defend the sovereignty of decision-making for all." 

Elsewhere, the UK's Prime Minister Boris Johnson's leadership is under scrutiny. Mr Johnson is facing calls – also from within the Conservative party – to resign. The PM admitted he participated at a gathering in Downing Street in May 2020, when strict containment rules were in place (Partygate). Labour has argued that the PM may scrap the covid restriction to distract from Partygate. 

Looking ahead, in just a few months, the PM's popularity and sterling's robustness will be tested again. Local elections are held across England, Scotland and Wales on May 5. However, this could be the lifeline that Johnson needs right now. A civil investigation in Partygate is underway but it is broadly accepted across the party that removing Johnson before this date would be extremely dangerous, as no one could be certain what the consequence would actually be.

Another factor that can go in the pounds favour is down to the Prime Minister's plans to scrap his plan-B Covid restriction in England, the Telegraph on Friday. This could underpin the pound, ultimately, due to prospects of aggressive hawkish actions from the Bank of England. Data will be eyed for heading back to around pre-pandemic levels and inflation will be monitored.

ECB in focus

As for the European Central Bank, analysts at Societe Generale are not expecting a hike this year and instead, they think the market is ahead of itself. ''Bur, '' they said, ''while that leaves us trying to work out where to take a stand against the euro's bounce, maybe the nest hedge against ECB hike enthusiasm is to buy EUR/GBP.'' ''November's Gross Domestic Product data may be as good as it gets here, and even if the current political chaos isn't market-relevant, sterling is overbought.''

UK's Gross Domestic Product being referred to was released on Friday which beat expectations.

• GDP +0.9% in November, Reuters poll +0.4%.
• UK economy 0.7% bigger than in Feb 2020.

The data suggested that Omicron's impact on growth may ultimately prove modest.