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Macro Commentary 

EURGBP has been trending lower since COVID-19 initially hit, with CB's becoming more hawkish. Is a change in trend on the way?

  • Both economies have benefitted from the COVID-19 recovery but have to deal with rising inflationary pressures. Consumer confidence is being hampered by higher prices, especially the energy crisis. 
  • European economic, industrial, services, and consumer confidence has declined in recent months to 112.7,13.9,9.1, and -8.5, respectively. U.K. sentiment is following a similar trend, although with retail sales declining, retailing reported sales improved in the U.K. in January to 28, from 8. 
  • Unemployment in both markets have declined significantly, with Europe at 7% and the U.K. at 4.9% in December, and we continue to see tight labour markets. 
  • Manufacturing PMIs remain expansionary in both regions, with the U.K. at 57.3 and the Eurozone at 58.7 in January. This outlines that there is underlying strength in these sectors. 
    1. Employment, new orders and production increase substantially in Europe and there are signs of easing supply chains. 
    2. U.K. reading was lower than December with weaker growth from new orders and further easing of delivery times. Employment was stronger 
  • Services and composite PMIs are expansionary in both regions, but the U.K. is growing faster than the Eurozone, at 54.1 and 54.2 compared to 51.1 and 52.3, respectively.
  • The U.K., in theory, should be able to recover quicker than Europe; the BOE are certainly ahead of the ECB from a Monetary policy standpoint, having raised rates twice already. 
    1. The ECB has indicated that they may raise rates in Q4 2022. This has caused the German 10yr yield to rally strongly in the superseding days.
  • Eurozone inflation continues to trend higher, reaching 5% in December; this could rise to 5.2% in January. U.K. inflationary data saw CPI rise 5.4% in December, up 0.5% M/M, and once again, this trend is set to continue. 
  • The time lag for interest hikes and impacting the end-consumer is considerable, and when we factor in how long rates are, they may not halt inflation or spending until they are at least 2.5/3%. Given the rate hike path of the BOE, this may not be until Q4 2023, if that. 
    1. The BOE target rate is 0.5%, the effective rate is 0.44520%. 
    2. The implied rate for December 2022 is 1.725%, and the market has priced in rate hikes in March and May for the BOE. 
  • The ECB seem even further behind the curve; the current target rate is -0.5%, with the effective rate at -0.5780%
    1. The market sees rate hikes down the curve from September, with the chance of a rate hike at 134.5%. The next meetings also have rate hikes priced in but only 0.1% at this time. 
    2. The bank has recently changed its rhetoric, but there is an increased chance they will have to play catch-up, bringing forward their rate hikes to Q3. 
    3. Inflation data is rising, with key inputs such as energy and food prices rising in recent weeks, which will put further pressure on banks. 
  • The Fed, BOE, and ECB are relying heavily on the recalibration of consumer demand following the Tsunami of buying we saw during lockdowns, which has caused the backlogs.
    1. The Omicron wave in China will likely cause further damage to lead times and delays, but as the cost of living rises, we expect demand has shifted to the downside but is being masked by the backlog of orders. 

Yield Curves 

  • The spread between yields is still steady, with the U.K. 10yr at 1.525%, compared to the German at 0.237%. Italian and Greek yields are at 1.909% and 2.588%; these economies have been more volatile recently and may struggle more than France, Germany, Spain and the U.K. The spread between the BTP and Bund is back above 1.654%. 
  • A large amount of Italian debt matures this year, and new debt issuance could cost less than current maturing debt, causing the cost of Italian debt to decline. The low levels now give the market room before the ECB gets nervous.
  • We expect the movement in yields to be the start of the re-pricing of these assets, kept artificially low. 
  • In our opinion, while the move of the European and U.K. bonds have been strong in recent weeks, we expect the trend of higher yields to pull through in 2022.
  • The tensions with Russia and Ukraine have caused the bond yields of all as investors move into safer assets and we expect a short term equilibrium to be found soon. 


Central Banks are raising rates and cutting asset purchases as inflation rises sharply, but the growth will moderate, which is a dark cloud for the economies and policy. It is a race to cap inflation, keep the employment market strong, and reduce growth decline. While it is normal for growth to decline at this time, if growth can bottom out at higher levels, this would ease long term angst. The U.K. is exposed to political risk at the time of writing; PM Johnson remains in office but seems to have lost the faith of a large proportion of society, especially the seats they won from labour during the latest election. EURGBP remains favoured sterling in recent months, the BOE moved first, and U.K. rates are preferential to the market. The ECB's language change caused EURGBP to rally, but we expect the market to remain on-trend as the BOE has moved first. We expect GBP to remain strong in the immediate term, but the risk-reward, in the long run, could favour EURGBP as the ECB becomes more hawkish. The recent reaffirmation at the 100 DMA could trigger losses towards the recent low at 0.83. 

Volatility Commentary

While the previous narrative of Central Banks was driven by the argument of transitory inflation, a significant shift in the monetary policy stance of both ECB and BoE is taking place due to inflationary pressure lasting more than expected. The recent hawkish turn of the ECB surprised markets the most, driving up volatilities for a pair characterised by Vol tending to realise lower than implied over the 1-month tenor.

In this respect, we expect EURGBP to trend lower in the short-term and retrace from the recent spike, boosted by the Carry component and materialising expectations of another BoE rate hike on the March meeting on the GBP side, and tightening of financial conditions on the EUR front.

Trade idea in 1 Month (Exp 14-Mar-2022):

  • Sell EUR Call / GBP Put in EUR 5mio, 0.835 Strike – Rec EUR 38K Circa
  • Buy Window Knock-In EUR Put / GBP Call in EUR 5mio, 0.84 Strike, 0.83 Barrier, Window 14/02/2022 – 14/03/2022 – Pay EUR 27K Circa
  • Total Structure Net Receive EUR 11K Circa (Spot ref 0.836)

Charts and Tables



Technical Analysis 

USD Index

The USD has failed into resistance at 96.387 and trades at 96 at the time of writing. The stochastics are falling out of overbought and have given a sell signal as the MACD diff is positive but converges. The rejection of resistance at 96.387 and the weakening indicators suggest lower prices towards 200DMA at 95.8845, with the 50% fib level at 95.6495. On the upside, the index needs to find support at 96 this could trigger gains back through 96.387 and 96.50, which is a robust level. We expect the dollar to weaken in the near term back towards the recent low at 95.173. 


JP Morgan Global FX Volatility 

The index surged through resistance to tet the 50% fib level at 8.105, the market has since corrected back to 7.7003. The stochastics are starting to fall in overbought territory but the MACD diff is positive and starting to converge. The index gave back previous gains quickly and the rejection of the 50% fib level could trigger losses back towards 7.59 before near term trend support at 7.4377. A break below the longer-term trend line at 7.30 would indicate a change in trend to the downside. 



After testing trend resistance EURGBP sold off sharply taking out support at 61.8% 0.84178 and the 50 DMA and 100 DMA. The MACD diff is crossing on the upside suggesting improving buying pressure and the stochastics are following a similar trajectory. The pair needs to break back through resistance at the 100 DMA and then test appetite around 0.84173 in order to improve the outlook on the upside. Conversely, the reaffirmation of resistance at the 100 DMA could set the scene for lower prices back through the recent low. 



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