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  • EUR/GBP is eyeing a test of session lows just under the 0.8800 level.
  • Euro weakness has dominated on Tuesday, amid lockdown and Italian political instability concerns.

Early on during European trading hours, EUR/GBP briefly slipped beneath the 0.8800 level for the first time since May 2020. The pair did not spend long in the 0.8700s, quickly bouncing back towards the 0.8840 mark. However, as US trade has ensued, the pair has fallen back towards the 0.8800 level and bears will be eyeing a second crack at a break below the 0.8800 level, with eyes on the next key area of chart support just to the south of the 0.8700 level.

Driving the day

EUR/GBP’s downbeat performance on Tuesday owes itself much more to euro weakness than sterling strength. Indeed, the euro is the second-worst performing G10 currency on the day behind the Aussie dollar, which has been hit by a much more dovish than expected RBA rate decision outcome (the bank announced an extension to its QE programme from April).

Turning to EUR fundamentals; the single currency was unable to derive much positive impetus from better than expected preliminary GDP numbers for Q4 2020, which, in fairness, were expected following the already released German, French and Spanish figures over the last few days. Firmer than expected preliminary French inflation numbers for January, which comes on the heels of equally strong German and Spanish numbers, failed to turn many heads; inflation is expected to pick up over the coming months due to base effects. Any continued surge in inflation beyond that would present something of a headache for the ECB, but that potential headache is still some way away and EUR traders don’t seem to worried just yet.

Rather than the data, the euro appears to have been much more focused on amid lockdown concerns and ongoing apprehension regarding the political situation in Italy; on the former, Germany is reportedly set to the extent its state of emergency until June and, on the latter, the Italia Viva party (who caused the original government collapse by withdrawing from the previous coalition) recently said that no progress has yet been made on the formation of a new coalition.

In terms of GBP, the news flow has been much more mellow; tensions on the Northern Ireland/Republic of Ireland border persist but do not appear to be affecting sentiment towards GBP much. Focus remains on the rapid pace of the country’s vaccination effort; 9.65M vaccines have now been administered, up 350K on the day, and the country remains on track to meet its mid-February target for vaccinating all of its most vulnerable.

ING comment that “With the risk of a ‘no deal’ Brexit no longer hanging over markets, the persistent GBP undervaluation of recent years should begin to dissipate… (and) the faster pace of UK vaccination and the scope for a stronger 2Q21 recovery should drive GBP higher this year.” They forecast EUR/GBP hitting 0.85 by the end of 2021.

Key levels EUR/GBP