Euro Pound Exchange Rate Softens on Weak Eurozone Retail Sales
The Euro Pound (EUR/GBP) exchange rate is weakening in the wake of disappointing retail sales in the Eurozone.
At time of writing the EUR/GBP exchange rate is trading around £0.8526, a 0.20% fall from this morning’s opening levels.
Euro (EUR) Undermined by Economic Headwinds
The Euro (EUR) is struggling for demand this morning as retail sales printed worse than expected. Against predictions of a modest increase, sales were stagnant in June. Despite stronger-than-expected German factory orders, the Euro is slipping.
Against expectations of a 1.2% growth were comfortably beaten by a substantial increase of 6.4%. in May. The figures represented the biggest rise since June 2020. A welcome boost to Europe’s biggest economy cheered investors.
However, the wider picture still paints a gloomy outcome and the Euro failed to rally. A string of recent troubling data, including worse-than-expected PMI data yesterday, kept a firm lid on EUR gains.
Furthermore, the widening policy divergence between the European Central Bank (ECB) and the Bank of England (BoE) could be denting the appeal for the Euro. Despite expectations of another rate hike from the ECB this month, speculation grows of it being the final hike of the tightening cycle.
Pound (GBP) Supported by Hawkish BoE
Meanwhile, the Pound (GBP) is managing to find modest success against some of its rivals. The BoE maintains its hawkish rhetoric. The expectation of another bold 50bps rate hike at the next policy meeting could be providing Sterling some support.
However, gains could be short-lived, as the persistent tightening could tip the UK into a recession by the end of the year. Inflation remains sky-high at 8.7%, far above the target rate and the highest amongst G7 countries, the BoE is determined to bring it down. Economists at Commerzbank have warned:
‘The fact that the BoE hesitated for so long means that in the end, an even more restrictive monetary policy will become necessary to anchor inflation expectations and limit second round effects, which might put strong pressure on the economy.
‘So whereas on the one hand, a more hawkish BoE approach – that is certainly the impression the central bank gave more recently – is positive for Sterling, the concerns about the effects on the economy leave a bitter taste. And that is likely to make it more difficult for Sterling to record gains, regardless of a continued rise in rate expectations.’
Euro Pound Forecast: Policy Divergence to Further Weigh on Euro?
Looking ahead, the Euro Pound exchange rate could see further movement amid a lack of major economic data. A couple of speeches from ECB policymakers could see the Euro weaken if further hints of a looming rate pause was to materialise.
Meanwhile, the Pound could find short-term gains from elevated rate hike expectations. But the overall concerns over the economic outlook could see gains pared.
