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  • EUR/GBP is back from lows of just above 0.8800 but still lower on the day.
  • GBP continues to benefit from the “vaccine trade” and is one of the better G10 FX performers.

EUR/GBP has been on the front foot in recent trade, having climbed from session lows below 0.8810 (fresh multi-month lows, incidentally) back towards the 0.8850 mark. The 0.8800 level will be a key area of support going forward. The pair is still lower on the day, however, down about 0.2% or 15 pips. GBP is one of the better G10 performing currencies on the day, while the euro has not been doing quite so well.

UK factors to consider

It seems that GBP continues to benefit from the vaccine trade; the country hit nearly 9M over the weekend, with a record 591K vaccines administered on Sunday alone. The country remains well ahead of competitors such as the US and EU, which continues to be cited as a GBP positive. Meanwhile, 300K residents of Hong Kong are expected to seek residency in the UK following China’s recent crackdown in the freedoms of the city, which some analysts are also citing as a tailwind for the currency.

The Telegraph reported over the weekend that social distancing rules may remain in place in the UK for the entire year unless vaccines prove to be 85% effective and the latest modelling suggests the country will experience a third large spike in deaths later in the year unless vaccines significantly cut transmission. This is obviously not good news, though if this is the case for the UK, it is likely going to also be the case for other countries, which will likely be impacted worse by a third wave later in the year given that the UK’s vaccination programme is ahead of most of its developed market peers. In other words, if economic restrictions cannot be lifted as quickly as hoped, this is unlikely to weigh on GBP given that other countries are likely to face the same problem.

In other news, the UK has applied to join the CPTPP, a free trade agreement involving 11 Asian and Pacific nations; analysts note that the immediate economic impact is likely to be modest as the UK already has free trade agreements in place with a number of CPTPP members. In other words, this news likely isn’t boosting GBP relative to its peers too much.

Eurozone factors to consider

A turn for the better in vaccine news has not been able to help the euro’s woes; European Commission President Ursula von der Leyen announced over the weekend that AstraZeneca had agreed to deliver an additional 9M does in Q1, bringing its total deliveries to 40M. This is still well below the number of doses the company was supposed to be delivering to the EU in Q1 and both France and Germany continue to threaten legal action against any firm that favours orders from the UK.

Significantly worse than expected German Retail Sales data for December is contributing to euro underperformance on Monday; sales fell 9.6% MoM in December, a much larger drop than the expected 2.6%. On a YoY basis, sales were only up 1.5% versus December 2019, well below expectations for a 5.0% rise. Meanwhile, Markit Manufacturing PMI data from the bloc was mixed; Spanish Manufacturing PMI came in below expectations for 50.9 at 49.3 while Italian Manufacturing PMI was a fair bit better than expected at 55.1 versus consensus forecasts for 52.4. Both were first estimates for December. Meanwhile, the final estimate for Germany, France and the Eurozone as a whole came in a little above the preliminary estimates released about a week and a half ago. Final point on Eurozone data; the bloc’s unemployment rate for December came in at 8.3% as expected, unchanged from November.

The euro largely ignored ECB commentary over the weekend; ECB Governing Council Member Isabel Schnabel talked about inflation, saying that a rise in inflation is expected this year but should not be confused with a sustained increase and that the central bank is still more worried about inflation being too low. A rate hike in the current environment would have devastating consequences, she said. Meanwhile, ECB Governing Council Member Klaas Knot talked about why he thinks global equity markets have been performing well as of late, saying recent strong performance could be the result of growing hopes for economic recovery and does not necessarily mean that prices are overly inflated. Finally, ECB Chief Economist Phillip Lane noted that buying stocks or bank bond is not in the ECB’s toolbox and reiterated that the current toolbox includes a mix of short-term rates, asset purchases, targeted lending and forward guidance.

Meanwhile, traders continue to ignore Italian political machinations as former PM Giuseppe Conte struggles to put together a new government. As long there is no general election, expect markets to continue to ignore events in Rome.