Negative Rates and New Lockdown Limit Downside in EUR/GBP

Key Talking Points:

• Increased talk about negative rates limits upside potential in GBP
• EUR/GBP may continue to hover around the 38.2% Fibonacci

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The British Pound is gathering buyer support to end the week after a new national lockdown caused a pullback in the British currency at the start of the new year. GBP/USD has been hovering around the 1.36 line for the past few sessions after bullish momentum was rejected in an attempt to break above 1.37. But USD crosses are coming under pressure this morning as markets are pricing in weak NFP numbers this afternoon, appealing to the Dollar’s safe-haven demand.

EUR/GBP continues to be in somewhat of a limbo as the pair has been unable to hold below 0.90 despite there being a resolution to Brexit before year-end. That said, despite the Euro underperforming the Pound in recent sessions, the common currency is still considered to be a strong performer in the G10 FX space, which is helping limit the potential downside in EUR/GBP.

Also keeping a lid on GBP appreciation is the increased talk about a rate cut from the Bank of England to offset the effect of a third lockdown on the economy. This means that negative rates rhetoric is back in play, bringing the estimates up to May from August, even as soon as February on estimates of some analysts.

But given Brexit uncertainty has been removed, and the new strain of Covid-19 no longer being just a UK issue, there is enough to start thinking that the Pound is undervalued despite the risk of negative rates, so a bullish view on GBP remains in the long-run.

EUR/GBP Daily chart

Short-term uncertainties are likely to keep a lid on the Pound, which means the 0.8836 area remains as a strong support for EUR/GBP in the coming months. Looking at current price action, we may see the pair continue to trade tightly around the 38.2% Fibonacci at 0.9044, with 0.8949 as the main support if it manages to break below the 0.90 mark.

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— Written by Daniela Sabin Hathorn, Market Analyst

Follow Daniela on Twitter @HathornSabin