Pound Euro (GBP/EUR) Exchange Rate Falls as UK Sales Contract by 3.7%
The Pound Euro (GBP/EUR) exchange rate has fallen sharply this morning amid a slump in UK retail sales and a risk-off market mood.
Investors will now be looking ahead to speeches from British and European central bank policymakers. Could policy divergence help Sterling recover some of its losses?
Pound (GBP) Slides following Worrying UK Sales Data
The Pound (GBP) is on the defensive this morning as a slump in UK retail sales weighs heavily on GBP.
In December, sales fell by 3.7%, which is far worse than the 0.6% fall that markets had expected.
The latest data suggests that the UK economy contracted last month after finally rising above pre-pandemic levels in November.
Suren Thiru, Head of Economics at the British Chambers of Commerce, argues that a decline in sales will likely translate to a ‘modest fall’ in GDP in December.
Bethany Beckett, a UK economist at Capital Economics, agrees. Beckett says that UK GDP could have fallen by 0.5% last month. She added:
‘With encouraging signs that the Omicron outbreak may have turned a corner and the government’s ‘Plan B’ restrictions due to be lifted next week, retail sales may recoup a bit of this fall in January and probably all of it in February and March.
‘That said, with the UK’s cost of living crisis looming, we expect a weakening in the consumer recovery to dampen retail sales further ahead. For the Bank of England, though, it’s about high inflation not weak activity. So we still think that interest rates will be raised to 0.50% in early February.’
With markets expecting another Bank of England (BoE) rate hike next month, this may be cushioning the downside somewhat.
Euro (EUR) Firms amid Risk-Off Mood
Meanwhile, the Euro (EUR) has firmed so far this morning as a souring market mood favours the safe-haven single currency over the riskier Pound.
The turnaround in risk sentiment comes as tensions between Russia and the West continue to bubble. Russia has amassed 100,000 troops on its border with Ukraine, stoking fears of an imminent invasion.
Today the US and Russia will hold crunch talks in Geneva in an attempt to resolve the issue.
US Secretary of State Antony Blinken, who will be taking part in the talks, said that a Russian incursion into Ukraine would ‘drag us all back to a much more dangerous and unstable time, when this continent, and this city, were divided in two… with the threat of all-out war hanging over everyone’s heads’.
Pound Euro Exchange Rate Forecast: Central Bank Speakers in the Spotlight
Looking ahead, central bank speeches are to be the focus for both the Pound and the Euro.
We have two speeches from European Central Bank (ECB) officials today, including one from ECB President Christine Lagarde. Central policy divergence has pushed GBP/EUR to a 23-month high in recent weeks, so more dovish comments could dent the single currency.
Along the same vein, GBP investors may be hopeful that a hawkish tone from BoE policymaker Catherine Mann could bolster the Pound. Although Mann, who is an external member of the BoE’s Monetary Policy Committee (MPC), has expressed dovish views, she was one of the eight policymakers who voted to hike rates at the bank’s December meeting. Could hawkish comments help the Pound Euro pair regain some losses?