• EUR/GBP has bounced from multi-month lows under the 0.8540 level in recent trade but continues to trade with a negative bias.
  • The EU and UK just agreed on a financial services MoU in a positive sign for future trade cooperation.

EUR/GBP has bounced from multi-month lows under the 0.8540 level in recent trade and is now trading back to the north of 0.8550 but continues to trade with modest losses of about 0.1% or about 10 pips on the session. The pair has been stuck within a roughly 0.8540-0.8640 range over the past three or so weeks and there is a growing sense that, at some point, something has to give.

Given that EUR/GBP is currently testing the lower bounds of its recent range, it seems likely that any break would be to the downside. If support at 0.8540 does go, the next notable support zone is around the psychologically important 0.8500 level (which also coincides with the 10 February 2020 highs). Then, there would be clear air all the way lower to 0.8300.

Driving the day

UK Retail Sales data for the month of February contained no surprises on Friday morning and, as such, GBP was hardly moved at the time. As expected, sales rose modestly on the month after January’s big drop. Retail Sales remain at subdued levels given the ongoing lockdown but is expected to receive a boost from mid-April when non-essential retail stores are permitted to reopen.

Conversely, the March German IFO survey did contain surprises in the fact that it was much stronger than anticipated. According to Capital Economics, “the unexpectedly strong Ifo Business Climate Index (BCI) for March provides further evidence that, other than in the auto sector, Germany’s manufacturers are flourishing”. However, notes the economic consultancy, “the rest of the economy is faring less well, and the extension of the virus restrictions means a sustained recovery is unlikely until the second half of the year”. As was the case with the UK data, the euro was hardly moved following IFO’s release.

EUR/GBP continues to trade close to multi-month lows as the outlook for the pandemic continues to worsen in the Eurozone but improves in the UK; commentary from European leaders regarding the bloc entering a third wave of the pandemic remains pessimistic. Most ominously, the leader of the German RKI said that there are clear signals that the current wave could be worse than the first while the German Health Minister is warning that the health system could hit capacity as soon as April. Another health official stated that there is a risk that new daily infections hit 100K.  

Meanwhile, the vaccine rollout continues to go well in the UK and Covid-19 infection, hospitalisation and death rates continue to steadily decline, helping GBP stay buoyant versus the majority of its G10 peers. Recent news of the EU and UK signing an MoU on financial services has also given GBP some minor impetus.

UK, EU agree financial services MoU

The EU and UK have agreed on a new Memorandum of Understanding (MoU) on financial services, in the first major step taken by the two sides towards post-Brexit cooperation on financial services. Financial firms in London will hope that the move will bring an agreement on financial services equivalence (that could grant UK financial firms access to the EU’s single market) closer. The newly agreed MoU sets out a framework for regulatory cooperation, creates a forum for discussing new rules and shares information.

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