EUR/GBP spikes higher towards 0.8500 as markets dial down global central bank rate hike bets

• EUR/GBP spiked towards 0.8500 on Friday as markets were rocked by the latest Covid-19 developments.
• The pair benefitted from a moderation of global central bank rate hikes.

EUR/GBP saw sharp upside on the final trading day of the week, surging from close to the 0.8400 level to print session highs near 0.8500. As trade draws to a close for the week a little earlier than usual thanks to the US Thanksgiving holiday weekend, the pair is trading in the 0.8480 area with on-the-day gains of about 0.85% or 72 pips. That marks the pair’s worst daily performance since 3 November, when the Bank of England surprised markets by opting to leave interest rates unchanged.

The latest rally only takes EUR/GBP back to as high as levels seen midway through the month, and the pair remains more than 1.3% below earlier monthly highs. The pair’s long-term downtrend is nowhere near yet under threat.

The reason for the heightened volatility on Friday was a combination of risk-off flows and dovish repricing of central bank expectations in light of the latest Covid-19 developments. Other analysts cited thin market liquidity conditions as exacerbating things due to the US holidays. GBP is typically more sensitive to swings in risk appetite than the euro, partially because the euro’s negative yield encourages traders to use it as a “funding currency” for risky bets, that then get unwound in times of strife (leading to “haven” flows back to the euro). Moreover, GBP is more exposed to dovish central bank repricing than the EUR given that markets near-term tightening from the BoE and not from the ECB (though, to be fair, the latter is set to end the PEPP in March).

The shift in central bank pricing that benefitted the euro versus the pound can be summed up by looking at by comparing movements in interest rate futures. The three-month December 2022 sterling LIBOR future was up over 10 points to 98.82 on Friday (implying 10bps less tightening expected by the end of 2022) versus a 4.5 point rise in the euro equivalent future (implying 4.5bps less tightening by the end of 2022).

Elsewhere, with focus very much on the macro story and the potential economic, fiscal and monetary implications of the newly discovered Covid-19 variant, Brexit headlines and BoE speak were ignored. In fairness, neither offered surprises; Brexit talks rumble on without signs of progress and while the BoE’s chief economist Huw Pill was understandably worried about the Covid-19 variant news.