GBP EUR Exchange Rate Softens After Underwhelming January UK Retail Sales

February 16, 2018 - Written by Frank Davies

STORY LINK GBP EUR Exchange Rate Softens After Underwhelming January UK Retail Sales

As January’s UK retail sales data fell short of forecast the mood of the Pound Euro (GBP EUR) exchange rate remained rather bearish.

Although sales still saw a rebound on the month, reversing some of December’s sharp -1.6% contraction, this was not enough to encourage investors.

With consumer spending failing to lift as markets had hoped this gave the Pound little particular cause for confidence, as high levels of inflation and the ongoing wage squeeze look set to keep the retail sector under pressure in the coming months.

As Rhian Murphy, Senior Statistician at the Office for National Statistics, noted:

‘Retail sales growth was broadly flat at the beginning of the New Year with the longer-term picture showing a continued slowdown in the sector. This can partly be attributed to a background of generally rising prices.’

While worries over Brexit have somewhat muted ahead of the weekend this was not enough to keep the GBP EUR exchange rate on a stronger footing.

Underwhelming Eurozone Inflation Data Limits Euro Upside

Confidence in the Euro, meanwhile, remained a little limited in spite of a solid rebound in the latest German wholesale price index data.

Although wholesale prices saw growth of 0.9% on the month in January this failed to encourage any particular bets on the prospect of higher Eurozone inflation.

Thursday’s weak Spanish consumer price index has underlined the rather lacklustre state of inflation across the currency union, increasing the likelihood of the European Central Bank (ECB) maintaining a dovish outlook for longer.

Unless there are signs of a meaningful increase in price pressures across the Eurozone ECB policymakers are unlikely to make any particular turn towards hawkishness.

Even so, the relative weakness of the US Dollar offered some support to the single currency ahead of the weekend.

While policy divergence between the ECB and the Federal Reserve looks set to widen over the coming months this has failed to particularly limit demand for the Euro.

Concerns over the likely impact of the Trump administration’s tax reforms and proposed budget on the US economy have helped to bolster EUR exchange rates, capitalising on the softening of the US Dollar.

However, if Eurozone data continues to print strongly in the coming week the pressure on the GBP EUR exchange rate is likely to increase further.

An improvement in the latest German and Eurozone confidence surveys could give the Euro a solid boost over the coming days, especially if domestic political jitters remain limited.

Stronger UK Wage Growth Could Offer GBP EUR Exchange Rate Rallying Point

While today’s UK retail data proved disappointing, though, its negative impact on GBP exchange rates may prove to be relatively short-lived.

As James Smith, economist at ING, commented:

‘When it comes to the outlook for interest rates though, it’s worth remembering that the Bank of England has already factored much of this weakness into their assessment of UK growth. Assuming the next couple of wage growth readings continue to paint an improved picture, we think policymakers will have enough confidence to hike rates in May - although of course, this remains heavily contingent on progress in the Brexit negotiations.’

The nature of Wednesday’s UK average earnings figures is likely to have a greater influence on the odds of the Bank of England (BoE) raising interest rates once again in the near future.

Any disappointment here could weigh far more heavily on the GBP EUR exchange rate, giving policymakers greater cause for hesitation.

Unless there are signs that wage growth is catching up to the persistently high levels of UK inflation there is unlikely to be any particular case for Pound strength.

Brexit-based developments also remain a potentially significant headwind for GBP exchange rates going forward, with jitters likely to mount as the next round of negotiations draws closer.

If the Conservative government fails to convince markets with its approach to the issue of Brexit the Pound may struggle to find any particular traction against its rivals.

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TAGS: Pound Euro Forecasts