Pound Euro (GBP/EUR) Exchange Rate Tumbles as UK Income Crunch Hammers Retail Sales
The Pound Euro (GBP/EUR) exchange rate slumped this morning after the UK’s latest retail sales data showed a larger-than-forecast contraction.
Meanwhile, the Euro (EUR) enjoyed an unexpected rise in Eurozone service-sector activity.
Pound (GBP) Drops as UK Retail Sales Contract
The Pound (GBP) took a tumble as today’s European session opened after worrying results from the UK’s latest retail sales report.
Economists had expected domestic UK sales to decline by 0.3% in March, matching the 0.3% contraction in February. Instead, February’s revised figures showed a slightly worse 0.5% contraction while sales in March shrunk by a whopping 1.4%.
The decline in spending came as the UK’s cost-of-living crunch hits households. UK consumers are tightening their purse strings in the face of surging prices, higher taxes, and a fall in real incomes.
Lynda Petherick, Head of Retail for the UK and Ireland at Accenture, argues that there is worse to come. She says that while retailers hope the sunny summer months will increase spending, that may not be the case:
‘In reality, each day brings fresh warnings from business leaders that prices will likely continue to climb, driving consumer confidence in the wrong direction for retailers.’
The poor sales report puts the UK’s income crunch back in the spotlight. As a result, the Pound has slumped.
The UK PMIs may add to the downside. Although manufacturing unexpectedly inched higher, service-sector activity fell by more than forecasters projected.
Euro (EUR) Firms as PMIs Beat Forecasts
Meanwhile, the single currency enjoyed a boost after the Eurozone PMIs printed better than expected.
The manufacturing survey showed a slight decline, though it came in above forecasts, while the services PMI unexpectedly improved. Overall, growth in the Eurozone picked up, though it was driven by the service sector.
Chris Williamson, Chief Business Economist at S&P Global, the company that compiled the survey, highlighted that the results were ‘stronger than anticipated’. He added that, while there are major concerns, this could lead to a more hawkish tilt from the European Central Bank (ECB). Williamson said:
‘The eurozone has therefore started the second quarter on a stronger than anticipated footing, confounding consensus expectations of a slowdown. However, the weakness of the manufacturing sector is a major concern as it points to an economy that is not firing on all cylinders. Similarly, the ever-rising cost of living suggests that service sector growth could cool sharply once the initial rebound from the opening up of the economy fades.
‘Policymakers may nevertheless tilt to a more hawkish stance, reflecting the persistence of unprecedented inflationary pressures at a time of encouragingly robust economic growth.’
Bert Coljin, Senior Eurozone Economist at ING, echoed Williamson’s opinion:
‘Consumers are ignoring the purchasing power squeeze for now as reopening effects boost service sector growth while manufacturing cools. We now expect the European Central Bank’s first rate hike to be in the third quarter.’
Pound Euro Exchange Rate Forecast: Central Bank Chiefs in the Spotlight
As the day continues, Sterling may be able to claw back some losses but GBP/EUR will likely remain in the red. The expectations of earlier ECB rate hikes come off the back of some hawkish comments from ECB officials, so this may be a long-lasting tailwind for the single currency.
That said, we have speeches from the ECB President Christine Lagarde and the Bank of England (BoE) Governor Andrew Bailey this afternoon. Their comments could certainly cause some movement. For instance, if Lagarde pushes back on rate hike bets and Bailey embraces them, the Pound Euro pair could recover some ground.
Both banks are in the unenviable position of trying to balance serious upside and downside risks to their respective economies. They are also both cautious when it comes to communications. This creates some uncertainty around the banks’ decisions and can mean that markets overreact to comments. As a result, there may be some volatility.