EUR/GBP pushes above 0.8500 as euro safe-haven bid returns

• EUR/GBP has pushed above 0.8500 this Tuesday amid a fresh wave of Omicron fears.
• The pair is being supported by the euro’s safe-haven appeal and an increasingly dovish shift in the market’s BoE pricing.

EUR/GBP run of gains looks set to extend into a fourth day, with the pair up another 0.35% on Tuesday and breaking above the key 0.8500 level in recent trade for the first time since 15 November. The latest move higher has taken the pair back to the north of its 21 and 50-day moving averages which reside at 0.8477 and 0.8491 respectively, both of which levels should now function as support. In terms of resistance to the upside, there is a balance area around 0.8520 that has acted as both support and resistance over the last two months, but the next big level is the 200DMA close to 0.8560 and then the November high at 0.8600.

Risk-off

Markets reverted to risk-off on mood on Tuesday, with global stock markets and crude oil (and other industrial/cyclical commodities) coming under pressure while safe-haven assets are enjoying a bid. The risk-off has been attributed by market commentators to comments from the CEO of Moderna, who said existing vaccines would be less effective against the newly discovered, highly evolved Omicron variant. There were also reports in the WSJ that makers of antiviral treatment Regeneron and Eli Lilly had seen the efficacy of their treatments fall versus the new variant.

However, other health officials and vaccine makers maintain that vaccines will still provide a decent degree of protection. Oxford University (who helped develop the AstraZeneca Covid-19 jab) said there is no evidence yet that vaccines won’t protect against severe disease from Omicron. In that sense, the market’s risk-on and risk-off moves need to be taken with a pinch of salt at the moment as the Omicron picture becomes clearer.

Euro outperformance, sterling struggles

Back to FX markets; the euro has been favoured as a safe-haven currency in recent days, more so than even the US dollar, which is one key reason why it continues to outperform pound sterling. Analysts have cited an unwind in carry trades amid risk off conditions as a key source of support for the single currency, as well as its lesser exposure to a dovish repricing of rate hike expectations. Much hotter than expected Eurozone inflation data in November didn’t impact FX markets too much at the time, but is hardly hindering the euro.

Meanwhile, Sterling remains vulnerable to an Omicron-related worsening of its domestic Covid-19 situation and markets continue to wind down expectations for a rate hike from the BoE next month. According to ING; “with the 16 December BoE rate decision drawing closer, a worsening of the virus situation globally and specifically in the UK, may not only put upward pressure on EUR/GBP due to the pound’s higher sensitivity to risk sentiment but may also mean markets could increasingly price out a December rate hike by the BoE”. However, the bank continues, “it is too early to draw any conclusions on that, but for today, a choppy risk environment may send EUR/GBP above 0.8500”.