EUR/GBP bears eye another bearish weekly close and below 0.8338 is key

• EUR/GBP is on the verge of completing a fifth consecutive bear week.
•  The next significant support from 2020 and 2019, 0.8282 and 0.8278 respectively.
• However, UK politics could be a spanner in the works.

At 0.8347, EUR/GBP is virtually flat on the day although the range has been between 0.8338 and 0.8372 on what has been a relatively busy calendar with plenty of fundamental themes that are ongoing in the background. 

Eurozone data coming through positive 

Firstly, Germany reported firm November factory orders. The data was impressive jumping to 3.7% vs the expectations of just 2.3% for the month. This could be a positive prelude for the Industrial production and trade data tomorrow. 

However, ''while the bounce in the German November data is welcome, the December PMI readings suggest rising risks of recession,'' analysts at Brown Brother Harriman explained in a note on Thursday.  ''The composite PMI came in at 49.9, the first time below the 50 boom/bust level since June 2020 and down sharply from the 62.4 peaks in July 2021.''

The Eurozone also reported November the Producer Price Index today. These also beat expectations and arrived at 23.7% YoY vs. 23.2 expected and 21.9% in November. ''This suggests that pipeline price pressures remain strong, with upside risks to the CPI reading in early 2022,'' the analysts at BBH explained.

Meanwhile, the December eurozone inflation readings were released on Thursday, and Germany's Consumer Price Index beat prior and the expectations marginally for the month of December, both MoM and YoY. Traders will now wait for the eurozone reports that come out tomorrow. The headline inflation is expected at 4.8% YoY vs. 4.9% in November and core is expected at 2.5% YoY vs. 2.6% in November.  

This all boils down to sentiment surrounding the European Central Bank and officials there remain split. With that being said, the ECB won’t meet until February 3, giving it some time to better assess the economic outlook as more data comes out.  The meeting, however is expected to be a low key event for forex considering the bank has already tipped PEPP will end as scheduled in March. 

One member, Martins Kazaks sounded hawkish yesterday though. On Wednesday, he said that the ECB is ready to raise rates and cut stimulus if needed. The bank, he continued, is ready to take action if the inflation outlook picks up and an early 2023 rate hike is a possible scenario.

Today, Francois Villeroy de Galhau sounded dovish and argued that the eurozone inflation is close to peaking, noting that December CPI data from France is showing the first signs of stabilization.  Villeroy added that “While remaining very vigilant, we believe that supply difficulties and energy pressures should gradually subside over the course of the year.”  

But the stabilization in prices doesn’t imply a policy shift. Rather, Villeroy repeated earlier in the week that his prediction for a “new inflation regime” under which price growth will be closer to the ECB’s 2% target than in the years preceding the pandemic. On that basis, monetary policy would “normalize in stages,” he argues. 

As for the covid variant, Villeroy also shrugged that off. The ECB Governing Council member  said the economic effects will be “relatively limited.”

“We have learned over the past two years that every Covid wave, however serious, has diminishing economic effects,” Villeroy said.

Overall, the analysts at BBH see financial conditions tightening in the eurozone this year at the worst possible time. The analysts explained that ''we are already seeing other signs of stress.  Italian yields have risen over the past few weeks and low demand for its 30-year bond offer yesterday is just another sign of trouble ahead.''

UK data, not much to cheer

As for the UK, firm final services and composite PMIs were reported.  Services PMI came in at 53.6 vs. 53.2 preliminary to 52.1, which dragged the composite up to 53.6 from 53.2 preliminary.   Still, the composite PMI is down two straight months and the lowest since February 2021.

''There is not much to cheer about,'' analysts at BBH argued.

''Much of the November data came in firmer than expected, though some of the strength in consumption was attributed to early shopping due to supply chain concerns ahead of the holidays.  We may have to wait until January to get a cleaner read on the UK economy but we see headwinds ahead from Brexit, energy shortages, and planned fiscal and monetary tightening.''

Elsewhere, besides Brexit and covid lockdown risks, investors are keeping a close eye on UK tax cut possibilities and implications for the pound. ''Cabinet member Jacob Rees-Mogg told his colleagues that the 1.25% increase in the payroll tax should be shelved as the rise in inflation and energy costs is hurting family pocketbooks,'' the analysts at BBH explained. 

A toxic cocktail of Brexit, rising energy costs, covid and pressures on the healthcare system has been a burden on the UK economy. There are pressures in the UK government which are calling for cuts and Rees-Mogg’s comments come after twenty Tory backbenchers called for Johnson and Chancellor Sunak to end the 5% VAT on energy and to remove environmental taxes on electricity.  

UK politics is a spanner in the works for the bears

Overall, traders are happy to be long of the pound due to the hawkishness at the Bank of England and prospects of tax cuts, so long as covid remains a minor threat. With that being said, UK political angst could throw in a spanner in the works for the pound bulls. 

Recent press has reported that some in Westminster are openly talking about a potential leadership challenge.

''While there is no imminent general election in the UK,  Johnson’s leadership is looking weak,'' analysts at Rabobank recent explained. ''This does nothing to strengthen confidence in post-Brexit Britain and, on the margin, will undermine the pound  We see EUR/GBP creeping up towards 0.87 during the course of next year.''

EUR/GBP technical analysis

Meanwhile, from a technical standpoint, the cross is on the verge of completing a fifth consecutive bear week and the increasing bearish momentum with lower RSI readings are confirming the latest drop. 0.8338 is key as being the wick of 24 February 2020. The next significant support from 2020 and 2019 will be 0.8282 and 0.8278 respectively. This is an area of imbalance that could well be mitigated in the coming weeks prior to any significant bullish correction.