EUR/GBP hits two-week highs in 0.8375 area, despite strong UK data bolstering case for further BoE tightening

• EUR/GBP rose to two-week highs on Tuesday in the 0.8375 area, despite strong US jobs data.
• Analysts interpreted the latest UK jobs release as bolstering the likelihood of another BoE rate hike in February.

A strong UK labour market report has failed to lift sentiment towards pound sterling on Tuesday, with GBP amongst the worst performing G10 currencies on the session, sending EUR/GBP to two-week highs in the 0.8375 area. Technical buying appeared to boost the pair, which now trades higher by about 0.2% on the day, as it broke above last week’s highs in the 0.8360 area. The currency pair is now probing resistance in the form of the November 2021 lows in the 0.8380 regions ahead of a test of the 21-day moving average at 0.8394.

Traders should be aware that, since mid-December, selling EUR/GBP rallies has been a profitable short-term trading strategy and, as UK economic data exceeds expectations and bolsters expectations for BoE rate hikes, this may well remain the case. To quickly recap the highlights of Tuesday’s UK jobs report; the ONS revealed that employers added 184K (a record number) to their staff payrolls in December. That saw the unemployment rate drop to 4.1%, its lowest since June 2020, whilst job openings hit a record high of 1.247M in the three months to December, double their levels in the same time period last year. “Alongside rising headline inflation rates and growing evidence that Omicron's impact has been modest, a February rate rise from the Bank of England looks increasingly likely” concluded analysts at ING.

Whether increased confidence in the likelihood that the BoE will follow up December’s 15bps rate hike with another next month translates into EUR/GBP reverting back towards last week’s sub-0.8350 lows remains to be seen. Downside in US and European equities on Tuesday amid a sharp rise in US government bond yields on Fed rate hike bets is currently weighing on sterling, just as lower equities are also weighing on other risk-sensitive currencies.

Stuart Cole, head macroeconomist at Equiti Capital, told Reuters that “with the FOMC and BoE already in tightening mode, it is difficult not to see the ECB similarly changing tack and moving policy towards fighting inflation also, particularly given the impact of soaring energy prices and the expectation that these are expected to continue their steady rise higher”. “We had a good start to the year, but that early euphoria has waned, and equities might have a difficult couple of weeks in the run-up to the Federal Reserve meeting” he continued. Choppier waters for overall risk appetite suggest EUR/GBP downside may be limited for now.