Pound Euro (GBP/EUR) Exchange Rate Drops as Sales Fall for Fourth Consecutive Month

Pound Euro Exchange Rate Dips as UK Retail Sales Print Below Expectations

The Pound Euro (GBP/EUR) exchange rate has fallen this morning as UK sales data reveals a contraction on last month. Sales volumes dropped by 0.9% in August, below market expectations of a 0.5% increase.

At the time of writing, GBP/EUR is trading at €1.1717, down slightly from today’s opening levels.

Pound (GBP) Sustains Losses as Retail Figures Disappoint

The Pound (GBP) has fallen against several of its peers this morning as UK retail sales drop by 0.9%. The contraction occurs amidst a resurgence of coronavirus cases and supply disruptions.

August marks the fourth consecutive month of falls in sales data, making this the longest period of declines in at least 25 years. Analysts suggest that the further easing of hospitality restrictions may also have partially prompted the fall, as people shifted spending to services such as eating out.

Food store sales dropped by 1.2%, while non-food stores reported a decline of 1% in trade – driven by falls in department stores (-3.7%) and other stores including those selling sports equipment and computers (-1.2%).

According to consultant Jessica Moulton, more retailers will struggle to obtain stock, exacerbating the UK’s supply problem in the months ahead. Her predictions are supported by Oliver Vernon-Harcourt, head of retail at Deloitte:

‘Supply chain issues and increased demand will continue to test retail leaders as we enter the Golden Quarter. Christmas will be impacted by these headwinds; there will very likely be shortages in some categories which will force consumers to make different choices.’

Euro (EUR) Trades Mixed Ahead of Inflation Reveal

The Euro (EUR) is trading in a mixed range against its peers ahead of the Eurozone inflation release later this morning. Annual inflation is expected to rise to 3% for August 2021; which would match the highest rate of inflation since November 2011.

European Central Bank (ECB) President Christine Lagarde said in a speech yesterday that:

‘Recovery in the Eurozone is faster than anticipated six months ago… but we are not out of the woods yet.’

Lagarde’s dovish tone inspired bearish trading amongst EUR investors at the time – but this tone may be reversed if inflation meets expectations. If figures print outside of the ECB’s target range, next week’s central bank policy meeting could see some vigorous debate.

At the last meeting, the ECB said it would start conducting a moderately lower pace of net asset purchases under the Pandemic Emergency Purchase Programme (PEPP), but reiterated the PEPP envelope would be maintained at €1.85 trillion until at least the end of March 2022.

Policymakers did not provide details about the tapering schedule and speed, saying the bank will purchase flexibly according to market conditions. High inflation was expected to be transitory, fuelling the cautious ECB narrative – although today’s figures may suggest otherwise.

Pound Euro Exchange Rate Forecast: Euro to Strengthen on Inflation Data?

Looking ahead, Eurozone inflation will likely be the main driver of movement this afternoon in the Pound Euro exchange rate.

If inflation prints high as expected, the Euro may enjoy tailwinds, climbing higher against the Pound in addition to its other peers.

If inflation prints below expectations, however, EUR downside is likely to be exacerbated as the ECB’s dovish narrative is proven justified.

Olivia Evershed

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