Pound Euro Exchange Rate Gathers Ground as UK Retail Sales Rebound Boosts GBP

UK Retail Sales Resurgence Shores up Pound Euro Exchange Rate

A solid rebound in UK retail sales growth encouraged the Pound to Euro (GBP/EUR) exchange rate to push higher ahead of the weekend.

As sales jumped 2.1% on the month, reversing some of January’s sharp -8.2% decline, worries over the economic outlook temporarily diminished.

Stronger levels of consumer spending have previously helped to shore up UK economic activity, encouraging bets that the first quarter gross domestic product could prove stronger than feared.

While comments from Bank of England (BoE) policymaker Michael Saunders were rather un-hawkish in nature this was not enough to dent GBP exchange rates as they recovered from a bearish week.

EUR Exchange Rates Fail to Capitalise on Improved German Business Confidence

Even so, the Euro (EUR) also found support this morning thanks to a stronger-than-expected Germany IFO business climate index.

Confidence in the health and outlook of the Eurozone’s powerhouse economy improved as the index jumped from 92.7 to 96.6, accompanied by a similar improvement in the expectations index.

All in all, this suggested that the German economy ended the first quarter on a more positive note, in spite of the recent rise in Covid-19 infections across the currency union.

However, as the finalised fourth quarter Spanish gross domestic product saw a negative revision this put fresh pressure on the single currency.

Rising German Inflation Forecast to Boost Euro Demand

Demand for the Euro could pick up next week, though, with the release of March’s German inflation data.

Forecasts point towards the headline inflation rate picking up from 1.3% to 1.7% on the year, an encouraging sign which could give the European Central Bank (ECB) greater cause for confidence.

Signs of rising inflationary pressure may give EUR exchange rates a leg up across the board, even as concerns over the Eurozone’s handling of the Covid-19 crisis lingers.

With fresh social restrictions and lockdowns having the potential to disrupt economic activity once again any sustained increase in infections could weigh heavily on the single currency in the days ahead.

Softer Mortgage Approvals Set to Weigh on Pound Exchange Rates

With UK mortgage approvals looking set to weaken once again in February the GBP/EUR exchange rate could face some selling pressure.

Evidence of a weakening UK housing market may weigh heavily on demand for the Pound, given the role that the sector has played in helping to support the economy during the pandemic.

Any signs of growing caution among households and lenders may well leave the Pound vulnerable on Monday, even as markets remain optimistic over the potential path out of lockdown.

As long as the finalised fourth quarter UK gross domestic product report doesn’t see any negative revisions this should also help to keep a floor under the Pound to Euro exchange rate.

Louisa Heath

Contact Louisa Heath