Pound Euro (GBP/EUR) Exchange Rate Falls amid Sharp Retail Sales Drop

April 21, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Falls amid Sharp Retail Sales Drop

Pound Euro (GBP/EUR) Exchange Rate Falls amid Sharp Retail Sales Drop

The Pound Euro (GBP/EUR) exchange rate weakened on Friday, as a sharp drop in UK retail sales weighed on GBP investors.

At the time of writing, GBP/EUR traded at around €1.1304, a decline of roughly 0.4% from Friday’s opening rates.

Pound (GBP) Mixed amid Sharp Retail Sales Drop

The Pound (GBP) endured mixed trade during Friday’s session, following a sharp drop in UK retail sales data.

Retail sales over March’s period dropped by 0.9%, significantly worse than the forecast of a 0.5% decline. The primary reason was considered to be stubbornly high inflation, which is continuing to have a detrimental impact on consumer spending power.

Real pay declines were also seen as a reason, with the cost of living crisis continuing to bear down on UK consumers.

However, some tailwinds may have been contributed by a stronger than expected service sector PMI flash. April’s activity eclipsed forecasts and rose to a one year high of 54.9. However, inflationary pressures also persisted here.

Chris Williamson, Chief Business Economist at S&P Global, commented: ‘This combination of faster growth and elevated price pressures put a twelfth rate hike by the Bank of England an increasingly done deal when it next meets on 11th May, and will add to speculation that further hikes may be needed.’

As such, elevated rate hike bets likely contributed in keeping Sterling from bottoming out during Friday’s early European session.

Euro (EUR) Rallies on Upbeat Economic Data

The Euro (EUR) gathered strength during Friday’s session, following the release of the latest Eurozone private sector PMI flashes for April.

The bloc’s economic activity appeared to climb to an 11 month high, on the back of strong resurgences in service sector activity over the month.

Furthermore, the upbeat data was accompanied by a report which outlined that service prices had shown little cooldown, which opened the door for further tightening from the European Central Bank (ECB).

Dr Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented: ‘Price developments in the services sector are likely to continue to worry the European Central Bank. Neither input prices nor sale prices are showing any significant slowdown in the upward momentum of prices. These play a particularly large role in the core inflation rate.’

Because of this, EUR investors likely increased their bets on further rate hikes, specifically as the May hike is currently under contention. Markets are likely leaning more towards a 50bps interest rate hike over a potential 25bps hike.

Furthermore, a muted market mood could also have contributed a further tailwind to EUR rates during the session. As a safer currency, it may have enjoyed some safe haven flows, allowing it to gain ground above riskier assets.

Pound Euro (GBP/EUR) Exchange Rate Forecast: German Data to Boost EUR?

Looking ahead to next week for the Euro (EUR), Monday is scheduled to see a key data release which could provide some impetus for the single currency.

The latest German Ifo business climate index for April is scheduled to print. A minor uptick is forecast for this index, reflecting a modest increase in optimism over the German economy from a business point of view.

This increase could bring cheer to EUR investors, as it reflects continual improvement in the German economy after a rocky start to the year. With the bloc’s largest economy beginning to recover, this is likely to strengthen the common currency.

For the Pound (GBP), a duo of data releases are due for release on Tuesday. The Confederation of British Industry (CBI) are due to release the latest industrial trends orders data, alongside the latest business optimism index.

With the index scheduled to decrease, it may weigh heavily on Sterling and prevent it from gaining much ground during the session.

The UK’s economy is under scrutiny following recent disappointing data, and this decline in optimism could weaken Sterling.

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TAGS: Pound Euro Forecasts