Pound Euro (GBP/EUR) Sours as UK Shoppers Cut Back Spending
The Pound Euro (GBP/EUR) exchange rate weakens as UK retail sales widely missed forecasts as inflation takes its toll on consumers.
At time of writing, the GBP/EUR exchange rate is around €1.1392, a 0.40% plummet from this morning’s opening levels.
Pound (GBP) Sinks as Retail Sales Suffered
Pound (GBP) is flagging this morning after retail sales for December widely missed forecasts and fell by 1%. Against expectations of a 0.5% climb, investors were optimistic that the winter World Cup and the cold snap could have buoyed sales.
But with the cost-of-living crisis still weighing heavily, and showing little signs of improving, consumers were forced to cut back their spending in the festive period. Sales declined by 5.8% compared to December 2021, the biggest drop for any December on record. Olivia Cross of Capital Economics said that the resilience the UK economy had shown throughout 2022 finally weakened in December. Cross added:
‘What’s more, we think the bulk of the drag on activity from high inflation and rising interest rates has yet to be felt and will weigh more heavily on retail spending and the overall economy in 2023.’
Retail sales volumes fell by 3% in 2022, the worst year on record since 1997. With expectations of the UK economy to fall into a recession will likely keep a firm lid on Sterling going forward. However, lower gas prices mean the Treasury can afford to scrap the planned energy bill increase in April.
Euro (EUR) Supported by Bolder Rate Hike Expectations
Meanwhile, the Euro (EUR) is rallying against the Pound amid a hawkish European Central Bank (ECB). Amid a lack of major economic data today, the single currency remains elevated amid the maintained position from the central bank on continuing its rate hike cycle.
ECB President Christine Lagarde addressed the World Economic Forum (WEF) yesterday and said that inflation remains far too high. Lagarde also reiterated the ECB’s commitment to reigning in inflation, and to ‘stay the course with rate hikes.’
With expectations mounting of another bold interest rate hike at the next policy meeting, markets are confident that a number of 50bps rate hikes could be on the cards. Economists at Commerzbank are confident in the Euro’s strength, and of sentiment improving:
‘Contrary to what is happening with the Fed, the market seems to be believing the ECB’s assertions, as rate expectations have hardly changed over the past few days. As far as monetary policy is concerned EUR is likely to be one step ahead.’
Pound Euro Exchange Rate Forecast: ECB Speech to Bolster the Euro?
Looking ahead, the Pound Euro exchange rate could see further movement when Lagarde addresses the WEF once more. A continued hawkish rhetoric could bolster rate hike expectations, and an improving market mood could also buoy investors.
Meanwhile, the Pound could head into the weekend battered and bruised after another turbulent week. With a thin trading calendar on the horizon, mounting domestic woes could force Sterling lower.