EUR/GBP has rebounded from session lows at 0.8480, which coincides with the pair’s 50-day moving average, in recent trade and currently trades close to 0.8490. That means, on the day, the pair trades with losses of about 0.2%, having opened the session to the north of the 0.8500 level and that, on the week, the pair is back to flat.
EUR/GBP’s downside comes despite a mixed UK GDP report released at the start of Wednesday’s European session. The UK economy grew at a 1.1% QoQ pace in Q3, data this morning showed, slower than the expected pace of 1.3%, though the YoY rate of growth was better than expected at 6.8% (forecasts were for 6.6%). The downside also comes despite more hawkish rhetoric from ECB policymakers including Slovakian central bank head Peter Kazimir and Austrian central bank head Robert Holzmann.
The former joined a throng of other ECB members who have been warning about upside inflation risks in the Eurozone, while the latter, who has also recently warned about upside inflation risks, outlined his scenario for 2022 rate hikes. In an extreme scenario, he warned, the ECB could lift rates before the end of next year, adding that if the ECB upgraded its inflation forecast for 2023-24 to above the 2.0% target and axed its bond-buying, that would signal a rate hike within the next two quarters.
EUR/GBP underperformance can be explained by the fact that, despite a subdued feel to trade in other asset classes, FX markets have adopted a somewhat risk-on posture on Wednesday. GBP is more risk-sensitive compared to the euro, so this typically weighs on EUR/GBP. But FX strategists have said that volatility in the coming sessions, or indeed until the start of January 2022, is expected to be mild as markets enter their typical holiday lull.
According to analysts at ING, the couple of weeks either side of Christmas day usually see low volatility for currencies, though they caution that “this year some seasonal tendencies will be mixed with the Omicron variant threatening to force new restrictions and markets still processing a week full of key central bank decisions”. As far as EUR/GBP is concerned, that suggests a meaningful break lower towards last month’s sub-0.8400 lows looks unlikely.
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