- A combination of factors triggers further selling around EUR/GBP on Friday.
- The ECB’s dovish tilt is seen as a key factor behind the euro’s underperformance.
- Positive Brexit-related news benefits GBP and puts pressure on the pair.
The EUR/GBP cross has seen heavy selling during Friday’s European session and has fallen to new yearly lows around the 0.8435 level, at levels not seen since February 2020.
The pair has struggled to capitalize on a modest intraday rally
The EUR/GBP pair has struggled to capitalize on a modest intraday rally. Afterward met with fresh selling near the 0.8485 area and has now retreated to new yearly lows. The underperformance of the common currency comes amid a spate of pessimistic comments from senior ECB officials. They stressed that the recent rise in inflationary pressures is largely transitory.
Christine Lagarde, head of the European Central Bank, said Thursday that the pickup in inflation was largely due to temporary factors. ECB member Pierre Wunsch then noted that the rising price pressures in the euro area are temporary. This underlines the desire of policymakers to avoid any premature withdrawal of monetary support.
On the other hand, the money market had fully priced in a 25bps rate hike by the BoE in December. Conversely, two officials indicated no hurry for that matter. Positive developments surrounding the Northern Ireland Protocol of the Brexit deal have also acted as a tailwind for sterling, which has also been supported by a more upbeat BoE.
After days of mounting tension, the European Union has agreed to remove most controls on goods and medicines coming into Northern Ireland from the rest of the UK. However, fears that the UK will reject the EU proposal could prevent GBP bulls from taking aggressive positions. Along with a weaker dollar, this could lend some support to the euro and limit losses for the EUR/GBP cross.
Therefore, it will be prudent to wait for some continuation selling before positioning for an extension of the recent bearish move witnessed over the past three weeks. The EUR/GBP cross could then accelerate the downward trajectory towards testing the next relevant support near the round 0.8400 level.