Pound Euro (GBP/EUR) Exchange Rate Weakens as UK Retail Struggles

January 20, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Weakens as UK Retail Struggles

Pound Euro (GBP/EUR) Exchange Rate Slips as UK Retail Slumps

The Pound Euro (GBP/EUR) exchange rate weakened on Friday, as the UK’s retail sector saw falling sales during December.

At the time of writing, GBP/EUR traded at around €1.1414, a loss of 0.2% from Friday’s opening rates.

Pound (GBP) Weakens as UK Retail Sales Slump

The Pound (GBP) weakened on Friday, as December’s retail sales data showed a surprising fall. Analysts had forecast retail sales to increase from -0.4% to 0.5%, whereas the data printed at -1%, with November’s figure also revised downwards to -0.5%.

Analysts highlighted that inflation, alongside increasing interest rates, were providing a strong pressure on UK household’s ability to spend over the holiday season. This ran in countenance to the profits posted by retailers through December, and instead sparked fears for the state of the UK’s economy.

Olivia Cross, an Economist at Capital Economics, explored the release. She stated:

‘[The data showed a] disappointing end to a difficult year. Today's retail sales release suggests that some of the resilience in the economy towards the end of last year appeared to peter out in December’

Cross further went on to state that high inflation and rising interest rates are likely to weigh more heavily in 2023.

With the UK’s economic outlook continuing to take a beating ahead of a prolonged recession, sentiment towards Sterling has continued to wain during Friday’s session.

Euro (EUR) Underpinned by Rate Hike Hopes

The Euro (EUR) traded in a mixed capacity on Friday, with the currency falling against riskier assets, but holding against others.

The European Central Bank (ECB) has repeated it’s hawkish stance towards inflation in the Eurozone, following Thursday’s address from ECB President Christine Lagarde to the World Economic Forum (WEF) during their Davos conference.

Lagarde stated that inflation was remaining far too high in the bloc, and reaffirmed the ECB’s commitment to curtailing it and preventing the high levels from becoming embedded within the Eurozone’s economy. She further committed to ‘stay the course with rate hikes.’

As such, while an upbeat market mood is serving to limit the safer Euro’s gains during Friday’s session, the expectations that continue to mount over the ECB’s tightening policy are providing a cushion against further losses.

Markets are confident that a series of 50bps rate hikes are on the cards, as the ECB attempts to bring inflation down to its target rate of 2%.

Economists at Commerzbank are confident that sentiment will improve towards the Euro, and that the single currency will maintain its strength. They stated:

‘Contrary to what is happening with the Fed, the market seems to be believing the ECB’s assertions, as rate expectations have hardly changed over the past few days. As far as monetary policy is concerned EUR is likely to be one step ahead.’

Pound Euro (GBP/EUR) Exchange Rate Forecast: PMIs in Focus

Looking ahead for the Pound Euro Exchange Rate, next week brings thin liquidity for both sides of the pairing ahead of Tuesday’s flash private sector PMis.

For the Euro, Germany’s manufacturing and service indexes are both forecast to remain in contractionary territory, with the bloc’s services PMI expected to return to growth. As such, this mixed picture could weigh on the single currency as the bloc’s largest economy continues to struggle, but the improvement on the wider scale could bring cheer to EUR investors and lend a modest tailwind.

For the Pound, both manufacturing and service indexes are expected to remain in contractionary territory. Manufacturing is forecast to show an uptick from 45.3 to 45.7, while the services index is expected to remain at 49.9.

The modest improvement could bring optimism, but with the UK’s private sector expected to remain in contractionary territory, GBP exchange rates are likely to weaken by reigniting recession anxieties amongst investors.

Furthermore, industrial action is likely to continue across the UK. Any headlines of further walkouts may weigh heavily on Sterling, as the UK economy already shows signs of struggling with the impact of the strike action.

International Money Transfer? Ask our resident FX expert a money transfer question or try John's new, free, no-obligation personal service! ,where he helps every step of the way, ensuring you get the best exchange rates on your currency requirements.

TAGS: Pound Euro Forecasts