GBP/EUR Slumps as Mario Indicates QE Discussions Set for Autumn

July 20, 2017 - Written by Toni Johnson

STORY LINK GBP/EUR Slumps as Mario Indicates QE Discussions Set for Autumn

A combination of adverse market reaction to UK retail sales figures and hawkish comments from European Central Bank (ECB) President Mario Draghi have pushed the GBP/EUR exchange rate down to an eight-day low.

The British Pound to Euro exchange rate has fallen to 1.1213 today, even though UK data was positive on the face of it and the ECB left policy unchanged.

Strong UK Retail Sales Fail to Have Positive Impact on GBP

UK retail sales figures for June may have clocked in better-than-forecast, but markets remain unimpressed with the overall outlook for the UK economy.

Sales grew 0.6% on the month, beating forecasts by 0.2%, while sales excluding fuel increased 0.4% more-than-expected at 0.9%.

Additionally, the monthly declines seen in sales and sales excluding fuel in May were revised smaller by -0.1% to -1.1% and -1.5% respectively.

Year-on-year sales grew by 2.9% - a 2% uptick on May and 0.4% higher than economists had anticipated.

Despite this positive news, investors continue to sell out of the Pound.

This is largely because the data confirms that the second-quarter saw retail sales grow 1.5% overall; which only just balances out the -1.4% decline seen in the first quarter.

Office for National Statistics Senior Statistician Kate Davies explained; ‘Looking at the quarterly data, the underlying trend as suggested by the three-month on three-month movement is one of growth, following a fall in quarter 1, suggesting a relatively flat first half of 2017.’

This data, however positive, is therefore by no means indication of a recovery and keeps the UK’s economic outlook uncertain for the time being.

GBP Weakens on Brexit Talk Roadblock as French Claim; ‘We Want Our Money Back’

French Finance Minister Bruno Le Maire has evoked the spirit of Margaret Thatcher after telling the UK ‘we want our money back’ in the European Parliament.

Marie insisted;

‘We can always debate the amount, but the fact that the United Kingdom must pay what it owes to the European Union budget is a non-negotiable prerequisite at the start of the talks.’

His words highlight the huge roadblocks facing the fledgling Brexit talks, with the potential for a €100 billion (£89 billion) divorce bill threatening to derail negotiations straight away.

UK ministers have claimed they will walk away from the talks if Brussels attempts to mandate that such a bill must be paid, which would leave Britain to presumably crash out of the EU with no trade arrangements in place, as well as without domestic legislation to replace that of the EU.

The UK government wants to address the issue of trade as soon as possible, but EU officials have been firm on the fact that the UK must settle its financial obligations before any discussion of future relationships can be discussed.

EUR Surges as Markets Fixate on Draghi Autumn Promise

The European Central Bank (ECB) has left interest rates on hold and has not discussed changes to quantitative easing, according to President Mario Draghi.

The Euro has rocketed, however, after markets responded positively to Draghi’s suggestion that discussions on when QE and monetary policy should be changed will happen in the autumn, as economists had expected.

Although not much to go on, this has nonetheless got markets excited for the possibility that we could receive a more concrete indication of when quantitative easing will be adjusted within a few months.

This has the potential to be a short Euro rally, however; it is not the first time markets have gone overboard with their interpretation of Draghi’s words and forced the ECB to clarify in order to curb expectations.

Draghi also cheered investors after stating that the strength of the Euro was not problematic, indicating that the ECB won’t be taking any steps in the near-term to weaken the common currency.

‘Financing conditions remain broadly supportive to secure a sustained return of inflation rates towards our inflation aim,’ he said.

Tomorrow the ECB will release its Survey of Professional Forecasters, while UK public sector borrowing figures are also due for publication.

UK government deficit figures are expected to have shown an improvement upon the previous month, with the spending shortfall anticipated to have shrunk by around -£1.7 billion.

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TAGS: Pound Euro Forecasts