EUR/GBP reverses earlier drop to multi-year lows in 0.8200 area, as euro trades inversely to commodities

• EUR/GBP reversed a sharp drop to multi-year lows near 0.8200 on Monday and is now back to trading near 0.8280.
• Geopolitics and commodity price action remains in the driving seat, with the euro moving inversely to commodities amid stagflation fears.
• ECB President Lagarde has a difficult task on her hands in delivering effective policy guidance at this week’s ECB meeting.

EUR/GBP reversed a sharp drop to fresh multi-year lows near 0.8200 on Monday and is now back to trading about 0.3% higher on the day in the 0.8280 area. That’s an impressive rebound given that, at earlier lows in the 0.8200 area (the pair’s lowest level since June 2016), EUR/GBP had been trading with on the day losses of about 0.6%. At earlier session lows near 0.8200, traders pointed out that the pair had been on course to experience its worst three-day run-off losses since mid-2020.

Behind the recent run of underperformance/volatility has been events in Ukraine. Surging commodity prices since the invasion has sparked fears of stagflation/recession in the Eurozone, which is more acutely exposed to economic sanctions on Russia than is the UK. The euro has had a remarkable correlation with the broader commodity complex in recent days (though mostly with oil and gas prices), with Monday’s trough in EUR/GBP coinciding with commodity prices pulling back from earlier session highs.

While geopolitical developments are set to remain in the driving seat and, thus, meetings between Russian and Ukrainian officials this week set to take the spotlight for FX markets, this week’s ECB meeting is an undeniably crucial event. The ECB is supposed to release updated economic forecasts – something which seems practically impossible in the current environment. ECB President Christine Lagarde has a difficult task on her hands.

She won’t want to be too dovish as that may threaten the ECB’s credibility with inflation set to rocket higher (due to commodities) and cause the euro to further crater, exacerbating Eurozone inflation woes. Equally, she won’t want to be too hawkish with the conflict in Ukraine expected to deliver a sizeable hit to Eurozone growth prospects this year. EUR/GBP is thus likely to remain choppy into the event and it will be difficult for the bulls to push it beyond resistance just above 0.8300.