Pound Euro (GBP/EUR) Exchange Rate Trades Narrowly as Eurozone Retail Sales Stagnate

June 6, 2023 - Written by John Cameron

STORY LINK Pound Euro (GBP/EUR) Exchange Rate Trades Narrowly as Eurozone Retail Sales Stagnate

Pound Euro (GBP/EUR) Exchange Rate Rangebound as Risk Appetite Remains Cautious

The Pound Euro (GBP/EUR) exchange rate trended sideways on Tuesday. The pairing was underpinned by disappointing data for the Eurozone’s retail sector and Germany’s factory orders. Softening inflation expectations also limited GBP/EUR’s downturn.

On the other hand, a risk-off mood kept pressure on the exchange rate as well as a slowdown in UK retail sales growth.

At time of writing the GBP/EUR exchange rate was at around €1.1604, which was virtually unchanged from that morning’s opening figures.

Euro (EUR) Slips as ECB Survey Hints as Slower Policy Tightening

The Euro (EUR) fell on Tuesday after some disappointing retail and industrial sector data. However, the single currency’s losses were cushioned by a pullback in global risk appetite.

A stagnation in Eurozone retail sales in May dented confidence in the Euro and the trading bloc’s economy. Retail sales were unchanged in April as consumers continued to reduce their spending on essential purchases such as food and car fuel. Essential items have suffered from soaring price inflation in recent months.

An unexpected fall in German industrial orders also weighed on the Euro on Tuesday. Orders at factories in Germany, the trading bloc’s largest member, fell by 0.4% in April versus expected growth of 3%. New orders remained poor whilst factories struggled to clear large backlogs.

A paring back of ECB rate hike bets also pulled the single currency lower. The ECB’s latest consumer inflation expectations survey found that expectations for inflation over the next 12 months weakened to 4.1% in April. Expectations for the three years ahead fell to 2.5% from 2.9%.

Comments from ECB policymaker Klaas Knot added to the more cautious bets on the central bank’s forward path.

Speaking in Luxembourg on Tuesday, Knot said:

‘It is reassuring to see the first signs of recent monetary policy actually being transmitted to the real economy.’

On the other hand, Knot did signal that underlying price pressures may take longer to curb and require further action from the central bank. These more hawkish comments helped to cushion the Euro’s losses.

Pound (GBP) Dips as UK Retail Sector Growth Slows

The Pound (GBP) edged lower over the course of Tuesday. Sterling came under pressure from a downturn in retail sales growth as well as a risk-off mood.

The latest figures released by the British Retail Consortium (BRC) saw retail sales growth slow to a seven-month low in May. Sales growth printed at a less-than-forecast 3.7% versus the expected growth of 5.2%.

Speaking on the sales slowdown, KPMG’s head of UK retail Paul Martin said:

‘The wild card for the retail sector remains uncontrollable food inflation, which shows little sign of coming down in the near future, and this is having a significant knock-on effect on non-essential spending.’

Signs of weaker demand in the UK’s housing market also dampened enthusiasm for GBP on Tuesday.

GBP/EUR Exchange Rate Forecast: Will Hawkish Signals from ECB Vice President Push EUR Higher?

A speech from ECB Vice President Luis De Guindos on Wednesday could push the Euro higher if he continues to signal further rate hikes from the central bank. The speech from De Guindos could add to the hawkish rhetoric from ECB President Christine Lagarde earlier in the week.

Also on Wednesday, the latest output data for Germany’s industrial firms could add to EUR’s gains if they print as expected. Production is set to rise by 0.6% after a 3.4% slump in March.

On Thursday, the third reading of Eurozone GDP figures could weigh on EUR if they print as forecast. The trading bloc’s economic growth is expected to have stagnated in the first quarter of 2023, a downward revision from previous estimates.

The Pound, meanwhile, will see no other data releases this week. Movement in Sterling may be inspired by any shifts in bets on further action from the Bank of England (BoE).

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