• EUR/GBP has been ebbing back towards weekly lows as Brexit tensions ease, though talks continue next week.
  • Longer-term, ECB/BoE policy divergence could keep pressure on the pair, with the bears targetting 0.8400.

EUR/GBP has been ebbing lower in recent trade, boosted amid positive sounds coming from UK and EU officials on the Brexit front. According to UK Brexit Minister Lord David Frost and Vice President of the European Commission Maroš Šefčovič, talks regarding the implementation of the Northern Ireland protocol will continue next week and focus on medicine and customs. Sefcovic said that the EU was pleased by a welcome change in tone from the UK in the talks.

At present, the pair trades with on the day losses of about 0.3%, having reversed lower from earlier session highs above 0.8560 to current levels in the 0.8530s. If trading conditions weren’t so quiet, with the European session already over and the weekend fast approaching, the pair would perhaps be in with a shout of testing weekly lows at 0.8520. Perhaps it still might.

Either way, an improved tone on the Brexit front and a paring of some of last week’s post-dovish BoE surprise short-term bets means that EUR/GBP is on course for modest weekly losses of about 0.3%. That still leaves it about 1.5% above last month’s pre-BoE lows just above 0.8400, but if the pair’s long-term trend of gradually grinding lower and posting lower highs and lower lows continues, then this will be a good level for the bears to target.

One argument in favour of the long-term bearish thesis for EUR/GBP is that ECB/BoE policy divergence favours depreciation. Though the BoE failed to live up to market hype for a 15bps rate hike earlier in the month, GBP STIR markets are pricing about 12bps worth of tightening in December (implying about an 80% probability of a 15bps rate hike). Economists are more split; according to a Reuters poll taken between 8-12 of November, 26 of the 47 surveyed economists said they expected a 15bps rate hike, while 21 did not.

“Particularly important for the (BoE) MPC will be the two upcoming labour market releases”, said Marchel Alexandrovich at Jefferies, as quoted by Reuters. “If both are decent, the majority of the MPC could well be minded to increase Bank Rate by 15bps in December. However, if the December report is on the soft side, then it would clearly be more prudent for the decision on rates to be delayed until February.” All but one of the 47 surveyed economists said the bank would start hiking rates by the February meeting.

This article was originally published by Fxstreet.com.Read the original article here.