EUR/GBP dips back under 0.8400 after hitting near one-month highs amid equity market turmoil

• EUR/GBP pulls back to 0.8370 area after hitting near-one-month highs on Tuesday amid equity market turmoil.
• Some traders may continue to use EUR/GBP longs as a means of hedging against equity market weakness.

After Tuesday’s global equity market turmoil that translated into broad weakness in the more risk-sensitive G10 currencies, sending EUR/GBP to near one-month highs in the 0.8420s, the pair has pulled back a tad and stabilised in the 0.8375 area. Sellers appeared to take advantage of the latest rally to add to short positions, perhaps in anticipation that risk appetite-related GBP weakness will prove short-lived and BoE monetary policy tightening in the coming weeks will continue to weigh. Risk appetite stabilisation is far from guaranteed against the backdrop of a highly anticipated Fed policy meeting on Wednesday and rising NATO/Ukraine/Russia tensions. Some traders may continue to use EUR/GBP longs as a means of hedging against equity market weakness.

Elsewhere, the latest stronger than expected German IFO survey results haven't translated into euro strength and didn’t impact EUR/GBP. The economic commentary from IFO was downbeat, with the group saying it is too early to talk about an economic turnaround in Germany. IFO added that there is not yet any easing of prices, with about half of firms surveyed looking to raise prices. Data has taken a back seat as a driver of FX market sentiment this week, with EUR/GBP not responsive to Monday’s mixed Eurozone and weaker than expected UK PMIs either.

That is likely to remain the case when individual Eurozone countries start releasing Q4 2021 GDP data at the end of the week, with focus more on themes like risk appetite, geopolitics and central bank tightening. In the same vein, as calls for UK PM Boris Johnson to resign grow ever louder in the UK as the Downing Street party scandal grows, FX strategists remain confident this won't result in lasting GBP weakness. “Should Johnson leave, his successor would likely be seen as a safe pair of hands and we do not see any political risk premium being built into GBP” say analysts at ING.