Pound to Euro: Sterling Slips to 5-Month Lows vs EUR

October 20, 2023 - Written by John Cameron

STORY LINK Pound to Euro: Sterling Slips to 5-Month Lows vs EUR

The Pound Sterling (GBP) has been on the defensive against the Euro (EUR) and US Dollar (USD) during the past 24 hours with vulnerability on domestic and global grounds.

Domestically, ING commented; “We saw some rather soft UK numbers this morning. Weak retail sales and a noticeable drop in consumer confidence, though both are among the most volatile UK data releases.”

Global risk conditions were also vulnerable with further concerns over the Middle East situation.

Equity markets remained under pressure which hurt the Pound.

There has been further demand for defensive assets with gold, for example, posting 5-month highs.

The Pound is unlikely to benefit from risk-averse conditions and the Pound to Swiss franc (GBP/CHF) exchange rate posted fresh 12-month lows below 1.0800.

The Pound to Dollar (GBP/USD) exchange rate dipped to 2-week lows on Thursday and, after a strong brief rebound, there was a fresh slide to 1.2100 on Friday.

The Pound to Euro (GBP/EUR) exchange rate also dipped sharply to 5-month lows just below 1.1450.

UK retail sales volumes declined 0.9% for September after a 0.4% increase the previous month and compared with consensus forecasts of a 0.3% decline.

Non-food store sales declined 1.9% on the month while food store sales posted a 0.2% increase.

Sales in the latest 3-month period declined 0.8% compared with the previous quarter.

ONS chief economist Grant Fitzner commented; “Retail sales fell notably in September with retailers telling us that cost of living pressures are influencing consumers, particularly for sales of non-essential goods.”

He added; “It was a poor month for clothing stores as the warm autumnal conditions reduced sales of colder weather gear.”

Neil Birrell, chief investment officer at Premier Miton Investors, considered that the Bank of England will welcome evidence of subdued demand; “This data will be seen as good news by the Bank of England, although it’s unlikely to be a major factor in their policy decisions.”

The weak data will, however, also spark fresh recession talk.

According to Capital Economics assistant economist Alex Kerr; “The 0.9% m/m fall in retail sales volumes in September meant sales volumes fell 0.8% q/q in Q3 and suggests that after the 18-month-long retail recession came to an end in Q1, the sector may already be back in recession.”

He added; “And as the drag on activity from higher interest rates intensifies, we still think that real consumer spending will decline by 0.5% from its peak to its trough over the coming quarters.”

MUFG noted; “Before today’s data, the consensus for Q/Q Q3 real GDP growth was unchanged. A contraction is now a greater prospect.”

UK consumer confidence registered a sharp decline for October with a 3-month low of -30 from -21 the previous month and compared with consensus forecasts of -20.

All metrics deteriorated on the month.

Joe Staton, Client Strategy Director GfK, commented; “UK consumer confidence has fallen nine points this month to -30 and takes us back to where we were in July this year. This sharp fall underlines that the cost-of-living crisis, and simply not having enough money to make-ends-meet, are still exerting acute pressure for many consumers.”

He added; “The timing of the sharp drop in our major purchase measure – down 14 points – will concern retailers across the land in the run-up to Christmas. The volatility we are seeing in consumer confidence is a sure sign of a depressed economic mood and there’s no immediate prospect of any improvement.”

The UK borrowing requirement declined to £14.3bn for September from £15.9bn the previous year.

Over the first half of 2023/24, the deficit increased to £81.7bn from £66.4bn the previous year.

Attention on fiscal policy will gradually increase ahead of Chancellor Hunt’s Autumn Statement and new borrowing forecasts from the Office for Budget Responsibility (OBR) on November 22.

Cara Pacitti, senior economist at the Resolution Foundation noted that higher interest rates will put upward pressure on the deficit.

She added; "Together, this is likely to reduce the Chancellor's already limited room for manoeuvre as he uses his Autumn Statement to prepare the economic pitch for next year's General Election."

The dollar overall has posted limited net gains, but failed to match highs from late last week.

The Euro to Dollar (EUR/USD) exchange rate found support close to 1.0530 and traded around 1.0575 on Friday.

Credit Agricole notes that the dollar has struggled to make further headway and added; “we continue to believe that the G10 safe-haven currencies and gold should stay the main beneficiaries from another bout of USD underperformance in the near term.”

MUFG overall sees limited scope for further dollar gains. It does, however, note; “The main risk of the pair moving closer to parity would be if geopolitical risks in the Middle East continued to intensify. While we expect the conflict between Hamas and Israel to remain contained, a broader regional conflict could trigger a sharper adjustment higher for energy prices and result in a weaker EUR.

In these circumstances, GBP/USD would also come under sustained pressure.

According to MUFG The signs of resilience in EUR/USD of late suggests to us that GBP underperformance may be more evident in a continued move higher in EUR/GBP.

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TAGS: Pound Euro Forecasts