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EUR/GBP eyes test of weekly highs as sterling loses some shine

  • EUR/GBP has edged higher on Thursday, primarily as a result of slight underperformance in pound sterling.
  • Concerns regarding the future UK/EU service trade relationship may well be weighing on sterling.

EUR/GBP has edged higher on Thursday, primarily as a result of slight underperformance in pound sterling. Bulls will be eyeing a test of a key area of resistance in the 0.8790s, which marks the weekly high and last Tuesday’s low. Broadly, the pair continues to trade within the parameters of a downwards trend channel that has been in play for the past few months, implying that despite minor near-term upside being seen in EUR/GBP, the most likely long-term direction remains towards the downside.

Driving the day

Sterling is one of the underperforming G10 currencies alongside USD and JPY on Thursday; concerns regarding the EU and UK’s future relationship regarding trade in services is in the spotlight after EU Chief Brexit Negotiator Michelle Barnier said that the EU needs more clarification from the UK before any it makes any decision on financial services equivalence (which would grant UK financial institutions access to EU financial markets).

Note that the UK and EU are working towards a March deadline for a deal on equivalence to be reached. The UK seems frustrated by the delays, with No.10 Downing Street saying on Wednesday that “despite the fact that we’ve supplied all of the necessary paperwork and are one of the world’s most preeminent financial centres, with a strong regulatory system, the EU still haven’t granted us full equivalence.”

Comments from Barnier regarding the need for further clarification come after Bank of England Governor Andrew Bailey warned on Wednesday that there were signs that the EU plans to cut the UK off from its financial markets and cautioned the EU against going down this road.

Services account for 7% of UK GDP and 40% of all UK service exports go to the EU. Thus, a failure of the two sides to agree a services trade deal is likely to weigh on the UK economy in the medium term, and there are already signs that this might have begun; Amsterdam overtook London in January to become Europe’s largest share trading centre in January, seeing a average of EUR 9.2B in shares traded per day versus EUR 8.6B in London.

Turning to the euro, which is one of the better performers on the day; no particular new or theme seems to be driving its outperformance versus GBP, though signs that the EU and US might be on the road to thawing out their frosty trading relationship could be helping. The US Trade Representative’s Office said on Wednesday that they look forward to working with their European allies in finding a solution on the Airbus/Boeing dispute after French President Emmanuel Macron reportedly raised the topic with US President Joe Biden earlier in the week. A positive step towards resolution already appears to have been taken; the US just paused its tariff rotation on EU imports that it was authorised to do by the WTO as part of the Boeing/Airbus dispute, which will be seen by Europe as a de-escalation.

EUR/GBP four hour chart

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