Pound Euro Exchange Rate Wavers on Mixed UK Data

Pound Euro (GBP/EUR) Exchange Rate See-Saws on Retail Sales and Rising Debt Repayments

(Updated 16:30, 19/11/21) The Pound Euro (GBP/EUR) exchange rate has zigzagged today, trending higher overall, following the UK’s mixed data earlier this morning.

While UK retail sales printed above expectations in October, public sector borrowing also came in higher than forecasts (see original article below).

However, the Pound (GBP) managed to regain the upside as a new national lockdown in Austria dented the Euro’s (EUR) appeal.

As the winter months approach, Covid cases are rising in Europe. Austria has become the first EU country to impost strict new measures, including a full national lockdown, mandatory mask wearing and compulsory Covid vaccinations.

In addition, Germany is considering restrictions amid rising infections. Germany’s acting health minister, Jens Spahn, told a news conference ‘We are in a national emergency’. Saxony is considering a partial lockdown, while Bavaria has cancelled Christmas markets and imposed lockdowns on districts with particularly high infection rates.

Fears of further restrictions, and the impact they could have on the European economy, have weighed on the Euro, allowing GBP/EUR to edge higher overall.

Original article continues below:

Pound Euro (GBP/EUR) Exchange Rate Stumbles on Public Sector Borrowing 

The Pound Euro (GBP/EUR) exchange rate has slipped today as rising debt repayment costs push UK government spending higher than economists expected. 

Meanwhile, some dovish comments from European Central Bank (ECB) President Christine Lagarde may have capped the single currency’s gains. 

Pound (GBP) Slips amid Budget Deficit Concerns 

The Pound (GBP) initially firmed this morning thanks to a rise in retail sales, but then stumbled as public sector borrowing exceeded expectations last month. 

Government borrowing printed at £18.8bn in October, €5bn more than economists had forecast. This is the second-highest October borrowing on record. The budget deficit has widened due to soaring inflation, which has seen the cost of servicing the country’s debt more than triple over the last year. 

With inflation projected to rise higher in the coming months and the Bank of England (BoE) likely to raise its Bank Rate, interest payments on government debt are set to rise further. 

This could prove particularly tricky for the Treasury as Rishi Sunak wants to stop borrowing to pay for day-to-day government spending by 2024. However, the Chancellor left himself very little headroom in his autumn budget, meaning a larger-than-expected budget deficit could derail his plans. 

However, a better-than-expected recovery in retail sales has cushioned Sterling’s downside. UK sales increased by 0.8% in October – the first rise in six months – beating forecasts of a 0.5% gain. The rise came as consumers started their Christmas shopping early to avoid prices rises and shortages on the shelves. In addition, sales increased despite a 6.4% decline in fuel as demand returned to normal after September’s panic buying. 

Euro (EUR) Capped by Dovish Comments 

Meanwhile, the Euro (EUR) initially dipped against the Pound but has managed to rebound and gain the upside. 

The initial fall in EUR/GBP came as markets reacted to the UK retail sales figures. However, as Sterling slipped the Euro was able to gain, despite some dovish comments from ECB President Christine Lagarde. 

Speaking at the 31st Frankfurt European Banking Congress, Lagarde said: 

‘When inflation pressure is expected to fade – as is the case today – it does not make sense to react by tightening policy. The tightening would not affect the economy until after the shock has already passed. 

‘Tightening policy prematurely would only make this squeeze on household incomes worse. At the same time, it would not address the root causes of inflation, because energy prices are set globally and supply bottlenecks cannot be remedied by the ECB’s monetary policy.’ 

These remarks may be limiting the Euro’s upside against the Pound today but they’re not preventing it, as the comments are in line with what analysts expect from Lagarde. 

Pound Euro Exchange Rate Forecast: GBP/EUR to Trade in a Narrow Range? 

The economic calendar is fairly quiet for the rest of the session, which means we could see the Pound Euro exchange rate begin to trade in a narrow range. GBP and EUR investors will likely be keeping a close eye on the headlines, however. 

For the Pound, Brexit news could be the focus. UK Brexit Minister Lord Frost will meet with his EU counterpart, Maroš Šefčovič, today to hold further talks. While there has been a calmer tone around negotiations in recent days, the UK’s threat to trigger Article 16 is still present and may weigh on GBP. 

Samuel Birnie

Contact Samuel Birnie