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  • EUR/GBP is a little lower on Wednesday, as the pair tries to break below 0.8800.
  • Looking ahead, the pair is likely to derive impetus from Thursday’s Bank of England monetary policy decision.

EUR/GBP continues to trade with a downside bias, though for now is struggling to break below support at the psychologically important 0.8800 level. On the day, the pair trades with losses of around 0.1% or about 10 pips. Thursday sees the release of Eurozone retail sales data and then the Bank of England’s latest monetary policy decision, which is likely to result in a pick-up in volatility.

Driving the day

Wednesday has thus far seen low volatility in the EUR/GBP exchange rate, though the prevailing trend of a gradual grind to the downside looks to still be in play and EUR/GBP bears will be looking for a more convincing break below the 0.8800 level to come soon. Market analysts continue to cite the comparatively more efficient mass vaccination drive in the UK versus the EU as a EUR/GBP negative, given that the UK’s faster vaccination drive is likely to result in the country reaching herd immunity comparatively sooner and then being able to reopen its economy earlier, setting the stage for a faster economic rebound in 2021.

Wednesday’s lack of significant volatility in the EUR/GBP pairing obscures the fact that, behind the scenes, there have been some important fundamental developments in the Eurozone;

Firstly, a new path out of the Italian political crisis is opening up; Italian President Sergio Mattarella has given former ECB President Mario Draghi an official mandate to form a government as PM. Whether he can coral enough support to build a majority in parliament is yet to be seen, but Italian financial markets seem to like the sound of a Draghi Premiership (the FTSE MIB is up 1.8% on the day and is the best performing Italian bourse, BTP yields are down over 7bps and the Bund/BTP spread is down more than 8bps).

Meanwhile, Final Eurozone Services and Composite PMI numbers were revised up from the flash estimate and the preliminary estimate of Consumer Price Inflation in the bloc for January came in significantly higher than expected; on the latter, most of this large upside beat was put down to transitory factors, though it will be worth watching to see whether this pick up in prices over the coming months has any legs. If it does, “is there much the ECB can do about?” asks the market.

Turning to UK domestic news, there hasn’t been much thus far this Wednesday, aside from a slight upwards revision to final UK services and composite PMI numbers for January. Meanwhile, the country passed the 10M milestone in terms of people who have now received their first Covid-19 jab. Sterling traders have their focus firmly set on Thursday’s Bank of England meeting; on which note, the Times’ shadow Monetary Policy Committee recommended that the bank leave interest rates unchanged this week and that whilst negative rates should be added to the bank’s toolkit, they should be left there untouched.

EUR/GBP key levels