Pound Euro (GBP/EUR) Exchange Rate Rangebound as UK Retail Sales Fall Unexpectedly

December 16, 2022 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Rangebound as UK Retail Sales Fall Unexpectedly

Pound Euro (GBP/EUR) Exchange Rate Trades Narrowly amid Risk-Off Mood

The Pound Euro (GBP/EUR) exchange rate trended sideways on Friday. The currency pair’s gains were limited by an unexpected slump in UK retail sales and a risk-off mood. A paring back of market bets on further European Central Bank (ECB) rate hikes also pushed the pair higher.

On the other hand, a surprise expansion in the UK’s services sector underpinned the exchange rate.

At time of writing the GBP/EUR exchange rate was at around €1.1461, which was virtually unchanged from that morning’s opening figures.

Pound (GBP) Bolstered by Boost in Services Sector

The Pound (GBP) ticked higher on Friday despite disappointing retail sales data. Sterling was bolstered by better-than-expected PMI figures. GBP traded within a narrow range against the Euro (EUR) amid a risk-off market mood, however.

November’s retail sales weighed on the Pound over the course of Friday. Sales fell by -0.4% last month unexpectedly, with the World Cup and Black Friday doing little to bolster the sector’s profits. Household spending remains limited in the face of the UK’s cost-of-living crisis.


Olivia Cross, an economist with Capital Economics, said:

‘We doubt there is a sustained recovery in retail sales volumes in the pipeline. We expect that high inflation will drive further falls in real household disposable income of 1.1% in Q4 2022.’

On the other hand, a below-forecast fall in PMI figures for December underpinned GDP. Whilst the manufacturing sector fell in deeper contraction, the country’s dominant services sector rose to a stable level of 50.

Euro (EUR) Drops as Cooler Inflation Undermines Hawkish ECB

The Euro (EUR) slipped against its peers on Friday. Mixed data releases weighed on the single currency. Losses for the currency were tempered by a retreat in global risk appetite, however.

Better-than-forecast PMIs for the Eurozone also lent support to the single currency. Whilst December’s PMI still pointed to a contraction across the trading bloc’s private sectors, performance improved. The data pointed to a milder downturn in the year’s fourth quarter.

Christoph Weil, senior economist at Commerzbank, said:


‘The rise in the purchasing managers' indices gives us hope that the recession in the euro area will be very mild.’

The evidence of a slower downturn came alongside cooling Eurozone inflation figures on Friday. The final reading of November’s printed a slowdown of 10.1% in November. The data releases led to doubt in markets over the European Central Bank’s hawkish stance after Thursday’s interest rate decision.

Bert Colijn, senior economist at ING, said:

‘Inflation pressures continue to fade due to lower demand and moderating supply chain problems. For the ECB, the latter adds to doubts about yesterday's hawkish tone.’

Hawkish comments from ECB policymakers helped to limit the impact of this data, however. Speaking on Friday, ECB policymaker Olli Rehn said further 50bps rate hikes were ‘likely’ in February and March.

GBP/EUR Exchange Rate Forecast: Will Impact of Strikes Worsen UK’s Outlook?

Looking to the week ahead for the Pound, the latest production figures for the UK’s manufacturing sector could weigh on the currency if they print as forecast. December’s data is expected to slide further into negative territory.

On Thursday, the final reading of third quarter GDP figures could also dent confidence in Sterling. The figures are set to confirm a contraction in the UK’s economy.

The impact of ongoing industrial action could also keep the Pound’s gains limited in the coming week. Hospitality and retail sector heads have warned that rail and postal strikes could impact profits over the festive period.

For the Euro, business confidence figures for Germany could push the single currency higher on Monday. December’s business climate index is expected to tick higher.

A slip in Germany’s November PPI could also see a downturn in the Euro. Whilst the downturn is expected to be cooler than October’s, the drop could see markets pare back bets on ECB rate hikes.

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TAGS: Pound Euro Forecasts