• EUR/GBP is set to end a torrid week at lows amid broad euro underperformance on Friday amid European lockdown fears.
  • The pair is back under the 0.8400 level and eyeing 21-month lows.

EUR/GBP has turned sharply lower on the final trading day of the week, dropping from Asia Pacific levels above 0.8420 to back below 0.8400 as it eyes a test of 21-month lows printed earlier in the week in the mid-0.8380s. Euro underperformance is a major driver of the recent downturn in the EUR/GBP currency pair, amid concerns about a rapid deterioration in the Eurozone economy as the pandemic takes hold on the continent.

Austria announced that it will reimpose a full lockdown on all people from Monday for 20 days, with restrictions to then continue afterward on the unvaccinated. Moreover, the country said that all citizens would be required to be vaccinated by 1 February 2022, or else face hefty fines. More concerning from a financial market perspective is that it seems as though Germany will be following closely behind. Germany’s health minister on Friday said that the health situation in the country had become so grave that a full lockdown, including on the vaccinated, could not be ruled out. According to a senior portfolio manager at Swiss asset manager Vontobel, “a total lockdown for Germany would be extremely bad news for the economic recovery”.

Negative news on the pandemic front in Europe has largely overshadowed a much hotter than expected German PPI report for October, as well as hawkish comments from outgoing ECB Governing Council member and Bundesbank President Jens Weidmann. In fairness, Weidmann is a well-known hawk and has spent most of the last decade unable to influence ECB policy, which is dominated by the doves, so his comments usually do not move the needle for the euro. Weidmann is quitting at the end of the year.

The downside on Friday caps off a torrid week for EUR/GBP. The pair has dropped more than 1.5% from above 0.8500 to current levels under 0.8400, its worst weekly performance since March 2020. Aside from the escalation of the severity of the European Covid-19 situation throughout the week, the pair has also been weighed by strong UK macroeconomic data. Earlier in the week, the latest jobs report provided early indications that there was not a spike in joblessness after the end of the UK government’s furlough scheme in late September and October inflation was hotter than expected.

Most recently, the October Retail Sales report released on Friday prior to the European open beat expectations, though economists put this down to consumers bringing forward their Christmas/holiday shopping amid supply chain concerns. FX strategists also touted the ongoing story of BoE/ECB divergence as a negative. The BoE is expected by many to start hiking interest rate as soon as December, while the key ECB policymakers such as President Lagarde have been trying to guide the market against expecting rate hikes as soon as 2022. Comments from hawkish ECB member Jens Weidmann, who leaves the bank at the end of the year, and comments from the BoE’s Chief Economist were ignored by FX markets.

Elsewhere, the tone of Brexit developments has become more positive this week and most market participants seem to expect the UK and EU to eventually bridge their differences regarding the implementation of the Northern Ireland Protocol.

Movements in bond markets, which reflect the deterioration in the European economic sentiment are also likely weighing. German 10-year yields down 7bps this week to their lowest levels since mid-September just above -0.35%, while UK 10-year yields are down less than 5bps and still comfortably above last week’s 0.82% lows.

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