Smaller German Retail Sales Decline Dents Pound Sterling Euro (GBP/EUR) Exchange Rate Upside
A smaller-than-expected drop in German retail sales saw the Pound Sterling to Euro (GBP/EUR) exchange rate come under renewed pressure today.
While sales still saw a solid -5.3% contraction on the month this was far less severe than the forecast -12% decline, offering some support to the Euro (EUR).
Even so, the case for further European Central Bank (ECB) policy action continued to grow as the Eurozone consumer price index softened to a four-year low in May.
With inflation throughout the currency union falling far behind the ECB’s 2% target the odds of imminent monetary loosening action picked up further, limiting the potential for EUR exchange rate gains.
Rising UK-China Tensions Weigh on Pound and Trade Outlook
However, the mood towards Pound Sterling (GBP) generally soured as tensions between the UK government and China showed signs of flaring up.
As Beijing threatened the possibility of countermeasures if the UK goes ahead with plans to offer permanent residency to Hong Kong residents GBP exchange rates weakened.
With the UK already looking set to face significant trade disruption in the months ahead, given the lack of progress towards a post-Brexit trade deal with the EU, confidence in the economic outlook diminished.
The GBP/EUR exchange rate also faced downside pressure on the back of April’s UK car production data, which showed a -99.7% collapse in output on the year.
GBP/EUR Exchange Rate Braces for Finalised UK PMIs
Looking ahead to next week, the Pound could face additional selling pressure on the back of May’s finalised raft of UK PMIs.
Confirmation that both the manufacturing and services sectors remained deep in contraction territory this month would leave investors with little reason to favour the Pound.
Unless either index sees a solid upward revision the GBP/EUR exchange rate looks set to remain on a weaker footing in the days ahead.
The release of the UK construction PMI could offer the Pound a rallying point, however, if the index bounces back as expected from the record low recorded in April.
Evidence that the construction sector has started to regain its footing as the initial impact of the Covid-19 lockdown passes may lift GBP exchange rates away from their recent lows.
Euro Vulnerable to Any Fresh Signs of Eurozone PMI Weakness
The Eurozone’s finalised raft of manufacturing and services PMIs may provoke additional volatility for the GBP/EUR exchange rate.
Although no change is expected from the initial round of readings the Euro remains sensitive to any fresh signs of weakness within the Eurozone economy.
Germany’s unemployment rate for May could see the single currency trending sharply lower once again, with forecasts pointing towards a solid uptick in unemployment on the month.
As long as the German labour market shows signs of weakness this should limit the downside potential of the GBP/EUR exchange rate, as investors brace for the possibility of an even deeper second quarter recession.