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  • EUR/GBP is correcting the recent 4% rally, which could make way for further upside.
  • Brexit is the major concern for the pound as the clock counts down. 

EUR/GBP is trading at 0.9191 at the time of writing, down some 0.44% having travelled from a high of 0.9258 and scoring a recent low of 0.9183.

The price is being driven but Brexit uncertainty, Bank of England and the European Central Bank sentiment as both economies steer through the second waves of the COVID-19 pandemic as we head into the flu season.

Another potential political fallout between the bloc nations

The eurozone has taken up the status as the epicentre of the virus once again as daily cases have started to exceed that of North America. 

The risk for the euro is that the current rescue package will not be enough to protect the economy from subsequent lockdown measures which could bring back a potential political fallout between the bloc nations.

There is also plenty ongoing in the geopolitical front which could bring back support for a wilting greenback that would likely weigh on the euro most of all. 

Brexit risks mounting

Meanwhile, Brexit is capturing the majority of the headlines since the pound tumbled almost 3% vs the greenback and over 4% vs the euro last week. 

The UK’s Prime Minister, Boris Johnson won yesterday’s vote in the Commons when he was securing a vote in favour of his internal market bill at the first reading.

However, there is plenty more risk to follow as greater resistance is likely to come from the Lords. 

Either way, it is negative for the pound given that if the government loses which would undermine Johnson’s leadership, the pound would be pressured. 

Or, if the government wins and a no-trade-deal Brexit becomes more likely which would also see the pound pushed closer to the edge of the abyss.

GBP overbought in positioning 

From a positioning perspective, both the euro and the pound are arguably sitting in highly overbought environments, but that is mostly down to dollar weakness and the market’s complacency over the threat of flu season. 

Both the UK and the eurozone are extending social distancing measures as flue season brings about a very concerning threat. 

How will one know if they have just the regular flu or the coronavirus? the ramifications could lead to extreme social behaviours short that would weigh heavily on consumer consumption, business investment and confidence and ultimately, higher levels of prolonged unemployment. 

GBP net positioning is at surprisingly high levels compared to periods when the risk of a “hard” Brexit was comparable to the current one.

The Brexit and flu season factor could well see a monumental shift in the data over the next month or so. 

 If the government fails to boost investment confidence, the long shadows over the UK economic outlook could remain in place for longer and this in turn suggest that fear of a BoE negative interest rate could remain on the table,

analysts at Rabobank argued.

EUR/GBP levels

Bearing in mind that the EUR has displayed broad-based strength in recent months, an escalation of tensions between the EU and UK governments with respect to the latter’s intention to break its commitment to the Withdrawal Agreement could threaten a move towards last year’s high in the 0.9325 area in the coming weeks,

the analysts at Rabobank explained.