Pound to Euro Exchange Rate Slips as UK Retail Sales Disappoint

UK Retail Sales Miss their Mark – Pound Euro (GBP/EUR) Exchange Rate Flounders

The Pound to Euro (GBP/EUR) exchange rate slipped on Friday as markets reacted to a below-forecast UK retail sales print.

According to figures from the Office for National Statistics (ONS) the UK’s overall year-on-year retail sales volume climbed by 1.6% in January, beating the previous period’s 1.5% climb but coming up short of the market forecast of a 2.5% rise.

On a month-on-month basis, retail sales volume increased by 0.1%, down from the market expectation of a 0.5% increase but beating the previous period’s -1.4% contraction.

This reading underlined the ongoing squeeze on consumer spending created by sky-high inflation levels, a devalued Pound and sluggish wage growth, though markets do expect this squeeze to lessen as the year progresses and the global economy accelerates.

Andrew Sentance, Senior Economic Adviser at PwC echoed this sentiment, stating:

‘Looking ahead, we should expect the squeeze on consumer spending from high inflation to ease as we progress through this year. But the economic benefits of lower inflation are unlikely to be felt until the second half of 2018 at the earliest (…) The silver lining to these consumer spending clouds is that the global economy is performing strongly, as we saw from very positive figures for growth in our EU partners released yesterday.’

Looking ahead, markets will also be keen to assess UK Prime Minister Theresa May’s trip to Germany today for the Munich Security Conference, with the PM also expected to hold talks with German Chancellor Angela Merkel.

If these talks prove fruitful and progress is demonstrated then the GBP/EUR exchange rate could find room to rally.

Poll Points to Support for German Coalition Deal – Euro (EUR) Exchange Rates Climb

Euro (EUR) exchange rates received a shot in the arm on Friday on news that some two-thirds of Germany’s Social Democrats (SPD) support a ‘grand coalition’ with Merkel’s Conservative Christian Democratic Union (CDU).

According to a poll conducted by Kantar Emnid, 66% of the SPD supported the coalition deal, with only 30% supporting another round of elections.

Beyond this, 78% of Merkel’s Conservatives backed the alliance in the poll.

This news helped ease market concerns that the SPD’s imminent 464,000 member vote might reject a coalition deal with the CDU in early March, with many investors anxious that the negotiations might fail and Germany will be forced back to the polls.

It should be stressed, however, that polls have often proved wildly wrong, and whilst this news did firm up demand for the Euro, markets will likely remain anxious about the vote until the actual result is revealed.

Beyond this, the latest DeutschlandTrend Extra poll has revealed that the public’s support for a Grand Coalition is dropping, with a mere 42% in favour of the alliance, and only 50% in favour of Merkel continuing as head of government.

In this sense it is clear that a return to the polls could spell the end of Merkel’s leadership, sow extreme uncertainty in the bloc’s largest economy and leave the Euro floundering.

Pound Euro (GBP/EUR) Exchange Rate Forecast: UK Wage Growth and Eurozone Inflation in the Spotlight

With on more pertinent ecostats this week markets will largely be looking to Brexit-related soundbites and next week’s run of releases, with the Pound to Euro (GBP/EUR) exchange rate liable to see volatility on the UK’s wage growth readings (due Wednesday) and the bloc’s inflation figures (due Friday).

If December’s average weekly earnings figures prove upbeat then anticipation will reach fever-pitch for a May rate hike from the Bank of England (BoE) – though it should be pointed out that the BoE will also be looking for progress on the Brexit transition front when deciding monetary policy.

John Cameron

John studied economics at Cambridge University and later became an MSTA qualified Technical Analyst. He began working for TorFX almost a decade ago and now holds a Senior Account Manager position. As well as lending his clients support and guidance, John has produced market commentary and detailed exchange rate analysis for a number of online publications.

Contact John Cameron