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  • EUR/GBP has been choppy and is a little higher, as resistance ahead of 0.8800 continues to cap the price action.
  • The euro is arguably somewhat underpinned by positive political developments out of Italy.

EUR/GBP has been choppy on Tuesday and the price action has so far followed a relatively similar pathway to Monday; during the early European session, the pair rallied into the 0.8790s, before reversing back towards the 0.8760s/70s. Recent GBP momentum that saw the currency outperform most of its G10 peers last week seems to have waned a little this week and the currency is currently looking at a second day of very minor losses versus the euro.

But these losses for GBP remain very minor as the investors/traders remain keen to sell EUR/GBP on rallies. Indeed, the underlying fundamentals remain supportive for sterling; the UK continues to expand its lead over other major developed economies in terms of the percentage of its adult population to have been vaccinated (particularly versus the EU) and its looks as though UK investments are going to maintain their current yield advantage over Eurozone investments given the recent Bank of England monetary policy meeting casting expectations for the UK to implement negative interest rates in doubt.

Driving the day

In terms of a news and fundamentals giving impetus to the price action on Tuesday, there are no stand out themes/developments/pieces of news. Arguably the euro is deriving some underlying support from improvement’s in the Italian political situation; the Bund-BTP spread (a measure of perceived Italian government credit risk versus German government credit risk) dropped to its lowest levels since January 2016 and is well below 100bps at this point. Former ECB President Mario Draghi, who recently received a mandate from Italian President Sergio Mattarella to form a government, received conditional backing from the Italian’s parliament’s two largest parties over the weekend. More recently, the Leader of the Forza Italia Party, Silvio Berlusconi threw the party’s support behind Draghi.

Markets are thus betting that the former ECB chief will be able to form a new government with a majority in parliament. Draghi is seen as a safe pair of hands and this, combined with his pro-European stance (he is said to want to push for a common Eurozone budget, the next step beyond the EU Recovery Fund which was funded by joint debt issuance), is being taken as a EUR positive.

Elsewhere, the euro has broadly been unfazed by mixed tier 2 Eurozone data; Germany saw the release of stronger than expected trade numbers for December. The country’s trade surplus was a little larger than expected at EUR 16.1B, driven by a surprise expansion in exports, which were underpinned by strong demand for German made goods from the US and China. Other sectors of the German economy almost certainly contracted in December amid the tightening of national lockdown restrictions to curb rising Covid-19 cases. Elsewhere, Italian Industrial Production for December was a little weaker than anticipated, with economic activity in the sector posting a surprise 0.2% MoM decline versus expectations for a 0.3% rise.

Turning to UK fundamentals; a few eye-catching alternative measures of UK retail spending have been released. BRC Retail Sales were down 1.3% YoY in January, following December’s 1.8% increase. BRC chief executive Helen Dickinson said that “the current lockdown has hit non-essential retailers harder than in November, with the new variant hampering consumer confidence and leading customers to hold back on spending – especially on clothing and footwear”. Meanwhile, Barclaycard said that UK consumer spending had fallen 16.3% YoY in January, its largest drop since May. These soft retail sales numbers appear not to have impacted GBP much, with traders likely opting to wait for the release of official numbers for January later in the month.

Looking ahead, ahead of ECB President Christine Lagarde and Bank of England Governor Andrew Bailey will both be speaking on Wednesday and the divergence in the two central bank’s respective policy stance is likely to be on show, something which could weigh on EUR/GBP.

EUR/GBP key levels