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EUR GBP Fluctuates amid Mixed UK Retail Data and ECB Uncertainty

  • EUR GBP Exchange Rate Near 0.90 – Pair slips from best levels
  • UK Inflation Disappoints – EUR GBP briefly hits 2017 high
  • UK Wage Growth Impresses – Sterling bought from its lows
  • Forecast: Eurozone PMIs Next Week – Euro could strengthen if they impress

Updated 12:50 BST 17/08/2017:

EUR GBP has been unable to hold its highs this week, as investors sell the recently strong Euro from its highs due to European Central Bank (ECB) uncertainties.

Fresh reports have indicated that ECB President Mario Draghi is unlikely to offer any new forward guidance at next week’s Jackson Hole symposium.

On top of this, Thursday’s ECB meeting minutes indicated the bank was concerned about the recent strength of the Euro.

Investors largely overlooked Britain’s latest retail sales report, which was mixed, and EUR GBP trended below the week’s opening levels at the time of writing.

[Previously updated 12:34 BST 16/08/2017]

The Euro to Pound exchange rate dropped from its best 2017 levels on Wednesday as investors reacted to Britain’s stronger than expected June job market results.

While the latest Eurozone Q2 growth projections were even stronger than the first projections, the Euro was unable to hold its ground against Sterling.

Investors were more eager to buy the undervalued Pound up from its lows, as wage growth beat expectations with including and excluding bonuses.

On top of this, Britain’s unemployment rate unexpectedly improved from 4.5% to 4.4%, the best rate since 1975.

July’s jobless claims report was also optimistic, as the number of continuing jobless claims unexpectedly dropped.

[Published 06:00 BST 16/08/2017]

Yesterday’s key Eurozone and UK data was both relatively disappointing, but Sterling was ultimately the loser and EUR GBP advanced slightly. Notable data due today and tomorrow could cause further shifts in direction.

EUR GBP began the week trading at around 0.9089 and trended flatly during Monday’s session. Yesterday the pair briefly hit a fresh 2017 high of 0.9131, but spent the afternoon trending close to the level of 0.9100.

Euro (EUR) Strength Limited as German Growth Misses Forecasts

The Euro was unable to capitalise on the Pound’s weakness on Tuesday, as Eurozone data was mixed.

Germany’s Q2 Gross Domestic Product (GDP) projections were forecast to come in at 1.9% year-on-year and 0.7% quarter-on-quarter. The yearly projection of 2.1% was better-than-expected, but quarterly growth looks to come in at only 0.6%.

The better-than-expected yearly figure was partially due to the previous figure being revised higher from 1.7% to 2%. The previous quarterly stat was also revised higher from 0.6% to 0.7%.

Overall, the data wasn’t entirely impressive to traders and it weighed on Euro demand.

Still, analysts weren’t put off by the report and noted that it indicated Germany’s economic recovery was still going strong.

Carsten Brzeski from ING Bank stated;

‘Germany’s economic success story goes on and on and on. And there is very little reason to fear a sudden end to the current performance, even though some kind of slowdown from current growth rates looks almost inevitable. The drivers supporting the domestic economy, like record high employment, higher wages and government consumption, might lose some momentum along the way, without turning negative.’

Finland’s Q2 growth projections were also published, but these saw a big slip from the previous figures. Year-on-year growth looked to slow from 2.7% to 1.6% while quarterly growth is on track to see a -0.5% contraction.

Pound (GBP) Sold as UK Inflation Falls Short

Despite the slightly disappointing German growth data, the Euro to Pound exchange rate advanced and this was largely due to the day’s UK data.

Britain’s July Consumer Price Index (CPI) results were forecast to accelerate from 2.6% to 2.7% year-on-year while remaining at 0% month-on-month, but both figures came in lower than expected.

The yearly inflation result was 2.6% and the monthly stat contracted at -0.1%. As inflation was lower than expected, the Bank of England (BoE) is unlikely to feel notably pressured into tightening UK monetary policy within the foreseeable future.

Connor Campbell from Spreadex commented on how the data affected the Pound’s movement;

‘Sterling turned sour this Tuesday after July’s UK CPI reading fell short of analysts’ forecasts.

While, at 2.6%, inflation is still troublesome – especially since wage growth is lurking around the 1.8% mark – it nevertheless wasn’t as high as the expected 2.7%. More importantly, it’s a decent way away from the 2.9% reading seen in May. And given that the Bank of England didn’t pull the rate hike trigger at that level, they’re not going to do it for anything lower, helping to explain why the Pound found itself in such a bad mood once the figure was released.’

With Bank of England tightening speculation now even softer, the Pound outlook is highly limited and investors have had no reason to buy the embattled currency from its lows.

The inflation report fell short of expectations due to falling motor fuel prices, though prices for clothing, utilities and foods were all higher in July.

EUR GBP Forecast to React to Eurozone Growth and UK Wages

Wednesday will be another highly influential session for the Euro to Pound exchange rate, as investors anticipate the Eurozone’s latest Gross Domestic Product (GDP) projections and UK employment stats.

Italy’s Q2 growth projection is forecast to improve from 1.2% to 1.5% year-on-year and remain at 0.4% quarter-on-quarter.

If the Eurozone’s second Q2 growth estimate is different to the first projection, this could surprise investors too.

This would potentially alter European Central Bank (ECB) tightening bets and affect the strength of the Euro.

Britain’s June employment report will include the latest wage growth results, which are forecast to remain at 2% excluding bonuses and 1.8% including bonuses.

If wage growth beats expectations, it could ease the Bank of England’s (BoE) concerns about UK wages and the ongoing consumer pay squeeze, as the gap between wages and inflation would narrow.

However, poor wage data would only worsen pay squeeze concerns and leave the Pound even less appealing.

This would help EUR GBP to sustain gains, at least until key Eurozone inflation and UK retail sales data comes in on Thursday.