EUR/GBP rangebound below 0.8650 ahead of ECB President Lagarde speech

• EUR/GBP is rangebound but a little lower as sterling remains underpinned
• Focus is will be on comments from ECB President Lagarde at 16:10GMT.

EUR/GBP is seeing rangebound trade on Monday between 0.8620-0.8660 parameters, though with a modestly negative bias, with the pair having slipped from Asia Pacific opening levels in the 0.8660s. Thus, at present, the pair trades lower by about 0.15% or by about 15 pips.

Driving the day

GBP, which had been amongst the best-performing currencies in the G10 earlier on during European trade, has lost some traction in recent hours, coinciding with EUR/GBP recovering off earlier 0.8620 lows to closer to 0.8650 and with GBP/USD dropping back from Asia Pacific highs around 1.4000 into the low 1.3900s. No particular fundamental theme or news is explicitly driving the price action on Monday, though a few factors are arguably supporting sterling versus its EUR counterpart.

Firstly, the UK’s vaccine rollout continues to outpace the rollouts in most other developed market countries (including the Eurozone’s), with over 20M Brits having now received their first jab, while markets are also comforted by the continued fall in new Covid-19 infections and deaths in the country. However, note that some desks now think that this positivity has now been priced into sterling.

Secondly, after last week’s “Roadmap to Reopening” announcement from the UK PM, which outlined the country’s plan for to ease pretty much all pandemic restrictions by mid-June (and injected a decent dose of optimism into GBP), focus is now on this week’s budget, which will be unveiled on Thursday. As usual, much of the contents of what is in the budget has already been leaked to UK press so the GBP market reaction later this week is likely to be limited. According to the Telegraph, the budget is set to contain three distinct “phases”.

Phase One is mainly about ongoing Covid-19 support schemes, which are set to be extended to June (furlough, business rates relief and VAT reductions, stamp duty holiday and “bounce back loans”). Phase Two is going to be about some fiscal injection to accelerate the post-Covid-19 recovery (£5B “restart” fund for giving small business grants, a £22B national infrastructure bank and aid for first-time homebuyers). Phase Three is going to be about paying for everything and is likely to entail freezing income tax rates and a modest increase to corporation tax. Though the support on offer from the UK government is much smaller as a percentage of GDP than President Biden’s stimulus plan in the US, GBP seems to have taken the leaked details of the budget well.

Elsewhere, dovish rhetoric with regards to the recent rise in bond yields from ECB officials is not doing the euro any favours. As a reminder, ECB President Christine Lagarde and other ECB officials last week signalled that the ECB is “closely monitoring” rising long-term bond yields. However, last Friday one ECB official went one step further and outright called for the bank to increase the pace of its asset purchases. Most recently, ECB Governing Council Member François Villeroy de Galhau was on the wires saying (with slightly odd wording) that so much as the recent rise in yields is unwarranted, the ECB must react against it (in clear wording; the ECB should react to any unwarranted rise in yields).

The first tool to use against rising yields, said de Galhau, is the flexibility of the bank’s Pandemic Emergency Purchase Programme (PEPP). Strangely, however, last week (a week where, as noted, ECB members signalled that they were closely watching rising bond yields), the rate at which the ECB bought bond actually dropped versus the week prior. PEPP purchases on the week dropped to around EUR 12B, down from over EUR 17B the week before. An ECB spokesperson said this was down to “higher redemptions”, but slowing asset purchases is hardly the signal the bank wants to be sending at a time when there is increased market scrutiny on the ability of central banks to keep bond market yields in check.

Elsewhere, slightly stronger than expected final Eurozone manufacturing PMIs for February and German Consumer Price Inflation numbers have been unable to distract from negative EU lockdown news (Italy to tighten restrictions in Turin, Milan and surrounding regions and Germany to extend travel restrictions).

Looking ahead, ECB President Christine Lagarde will be speaking at 16:10GMT and there will be a lot of focus on anything she might or might not say on the pace of asset purchases following recent attempts by ECB officials (including Lagarde) to jawbone bond yields lower again.