EUR/GBP leaps above 0.8550, now testing 200DMA, as pound hit with UK on verge of tougher Covid-19 restrictions

• EUR/GBP lept above 0.8550 to its highest levels since mid-November, with the pound hit in anticipation of further UK Covid-19 curbs.
• The pair’s rally has thus far been halted at the 200DMA, but bulls are eyeing a move to 0.8600.

EUR/GBP has seen substantial upside on Wednesday, rising to the north of the 0.8550 mark for the first time since mid-November as sterling slipped to its weakest level of the year so far against the US dollar. The pair is currently testing its 200-day moving average at 0.8559, having backed of from earlier session highs close to 0.8570.

Whilst the bulk of the move has been triggered by concerns about the UK government implementing tighter Covid-19 curbs, technical buying is likely also playing a role. EUR/GBP broke to the north of a descending trendline that has been in play since early October and a break above the 200DMA would likely usher in further buying pressure to send the pair back to its November high just shy of 0.8600.

Driving the day

The pound is being weighed on by the prospect of the reimposition of Covid-19 curbs that, according to analysts, clouds the outlook for the UK economy and may delay the BoE’s monetary tightening plans. The FT reported that UK PM Johnson is on the verge of announcing the implementation of “Plan B” Covid-19 restrictions, including the requirement of vaccine passports for access to large venues, as well as a recommendation to work from home, all in an attempt to slow the spread of the Omicron Covid-19 variant.

According to MUFG, “a further tightening of restrictions with people being asked to work from home will dampen the growth outlook… (and) means that the Bank of England is even more likely to hold off from raising rates until February”. By contrast to policymakers at the Fed and ECB, BoE members have expressed comparatively higher levels of concern about the potential impact of the spread of the Omicron variant on the economy. Last week, one of the bank’s most hawkish members Michael Saunders suggested a more patient approach to rate-setting might be warranted in order to wait for more data on the new variant.