Pound Euro (GBP/EUR) Exchange Rate Rangebound after Buoyant UK Retail Sales Figures

April 26, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Rangebound after Buoyant UK Retail Sales Figures

Pound Euro (GBP/EUR) Exchange Rate Supported by BoE Rate Hike Bets

The Pound Euro (GBP/EUR) exchange rate traded sideways on Wednesday amid a risk-off mood. The pairing saw its gains capped by hawkish signals from European Central Bank (ECB) officials.

On the other hand, above-forecast UK retail sales data and Bank of England (BoE) rate hike beets underpinned the pairing.

At time of writing the GBP/EUR exchange rate was at around €1.1291, virtually unchanged from this morning’s opening figures.

Pound (GBP) Bolstered by Stronger-than-Expected Retail Sales Data

The Pound (GBP) made strong gains on Wednesday after better-than-expected UK retail data. Bank of England rate hike bets also lent support to Sterling.

April’s distribute trades figures, collated by the Confederation of British Industry (CBI), rose to an above-forecast +5. Analysts highlighted the 10.1% increase in benefit payments as a factor in the surprise increase in sales.

Gabriella Dickens, senior UK economist at Pantheon Macroeconomics, predicted that the recovery could be short-lived though:

‘The boost from the hike to benefits, however, will prove to be temporary, given that the real value will decline again over the coming months as prices continue to rise. In addition, both business surveys and the Insolvency Service’s data on redundancy notifications suggest employment will merely flatline over the coming months.’

Bets on additional interest rate hikes from the BoE also lifted Sterling on Wednesday. Markets continued to price in a 25bps rate hike from the central bank at its May meeting.

Euro (EUR) Boosted by Hawkish ECB Rhetoric

The Euro (EUR) climbed on Wednesday as market mood remained cautious. Hawkish signals from ECB officials also prompted strong gains in the single currency.

Speaking on Wednesday, ECB policymaker Boris Vujcic signalled that the central bank would need to continue to raise interest rates:

‘Inflation is falling, but core inflation is stubbornly high. We have no choice but to continue raising interest rates. We’ll have to do this until we see a change in the trend.’

Also on Wednesday, ECB board member Constantinos Herodotou hinted that core inflation remained ‘sticky’ and that there was more work for the central bank to do.#

Markets are now widely anticipating a rate hike from the ECB at its next meeting, although investors remain unsure as to the scale of the increase.

Speaking on the ECB’s potential forward path, ING’s global head of macro Carsten Brzeski said:

‘For next week, both a 25bp and a 50bp rate hike seem to be on the table. The next inflation print, credit developments and the latest Bank Lending Survey, all to be released next week, will tip the balance. We think that given the growing divide within the ECB, a rate hike of 25bp would be a typical European compromise.’

GBP/EUR Exchange Rate Forecast: Will BoE Rate Hike Bets keep Pound Buoyed?

The Pound will see a sparse data calendar over the rest of this week. Sterling could see a boost off the back of persistent BoE rate hike bets.

On the other hand, the prospect of additional industrial action may dent confidence in GBP this week.

The Euro could see a boost on Wednesday if Eurozone economic sentiment improves as forecast. April’s figures are expected to improve to 99.9 after three consecutive months of declines.

Friday is set to bring a range of high-impact data for the Euro. Firstly, first quarter GDP growth figures are set to indicate a 0.2% expansion in Germany’s economy. A rebound in the economy of the trading bloc’s largest member may lift EUR.

Conversely, cooler first quarter growth figures for the Eurozone could limit any gains for the single currency. The rate of expansion in the trading bloc is expected to slow to 1.4% from 1.8% in the final quarter of 2022.

Finally for EUR on Friday, a mild downturn in Germany’s April inflation could deepen losses for the single currency. Easing inflation may also prompt a pullback in ECB rate hike bets.

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TAGS: Pound Euro Forecasts