EUR/GBP rebounds as Russia/Ukraine tensions ease, remains capped well below 0.8400 amid UK data focus

• EUR/GBP rebounded from support in the 0.8350 area and is trading around 0.8375 amid euro outperformance as geopolitical tensions ease.
• EUR has underperformed recently on fears that a Russia/Ukraine war and associated sanctions might hurt the Russian gas import-dependent Eurozone.
• Strong UK wage growth is helping to keep the gains capped under 0.8400, with analysts also eyeing Wednesday UK CPI.

EUR/GBP has rebounded from support at the 0.8350 area to trade closer to 0.8375, up around 0.3% on the day, amid broad euro outperformance as Russia/Ukraine tensions seemingly ease. Reports suggested on Tuesday that Russian troops have been returning to their bases from attack positions, a move which financial market participants have interpreted as a de-escalation of the risk of imminent war. That has subsequently eased concerns about the Eurozone’s economic vulnerability to a Ukraine/Russia conflict and associated sanctions on the former given the bloc’s reliance upon Russian gas imports.

The pair continues to trade substantially below last Friday’s pre-geopolitical tension-related euro underperformance levels above 0.8400 and will likely struggle to rally to the north of the big figure in the absence of further signs of de-escalation. Another factor contributing to the likelihood that EUR/GBP’s gains will, for now, remain capped, was UK labour market data on Tuesday, which economists said strengthens the case for further tightening from the BoE in the coming months. The UK unemployment rate was 4.1% as expected in December, unchanged from November’s levels, though wage growth metrics came in substantially hotter than forecast.

“December's pick-up in wage growth will maintain the pressure on the MPC to hike the Bank Rate again at next month's meeting” said analysts at Pantheon Macroeconomics. With the latest remarks from ECB officials, including President Christine Lagarde on Monday, seeking to push back against expectations for excessively hasty policy tightening from the ECB, BoE/ECB divergence could weigh on EUR/GBP this week. Analysts flagged Wednesday’s release of UK January Consumer Price Inflation data as another risk event to keep an eye on that could further add to this narrative.