- Pound Euro Exchange Rate Drops to 1.16 – UK inflation fails to impress
- Euro Benefits from French Political Stability – Macron’s first days as President impress
- UK Retail Sales Soar – Boosts Pound Euro from lows
- Forecast: Eurozone PMIs Next Week – How has Eurozone economy performed in May?
The Pound Euro exchange rate put in a firm half-cent recovery on Thursday morning as investors reacted to the day’s UK retail sales results from April.
Retail sales were already expected to improve in April due to Easter, but the figures were far higher than expected.
Month-on-month retail sales jumped from -1.4% to 2.3% while yearly sales doubled from 2% to 4%. This was largely due to Easter but also the warmer weather giving consumers the mood to shop.
After trending in the region of 1.16 since Tuesday, GBP EUR recovered to 1.17 on Thursday. The pair remained around half a cent below the week’s opening levels.
[Previously 16:55 BST 18/05/2017]
Pound Euro Exchange Rate Hits New Lows on Wednesday
Despite the unexpectedly strong UK unemployment rate figure on Wednesday, the Pound was unable to benefit due to concerns about slowing wage growth and rising inflation in Britain.
As a result, the strong Euro was easily able to push the Pound Euro exchange rate down to its lowest level since March, 1.1600.
Wednesday’s Eurozone data helped the shared currency remain firm on top of the increased Euro optimism this week.
Eurozone inflation improved from 1.5% to 1.9% year-on-year as expected, according to the final April inflation report. Italy’s trade balance beat expectations, rising to a surplus of €5.42b.
Thursday’s UK retail sales data is likely to be influential to the Pound, but may not be enough to help the pair recover this week’s losses.
[Previously updated 14:12 BST 17/05/2017]
Wednesday’s UK data was unable to increase Pound demand notably. While the Pound Euro exchange rate recovered slightly from its worst weekly levels, it remained in the region of 1.16 and over a cent below the week’s opening levels.
Despite news that UK unemployment had hit its lowest level in over 40 years in March, investors remained concerned due to news that wage growth was slowing.
Wages excluding bonuses were predicted to remain at 2.2%, but they unexpectedly slowed to 2.1%. This increased market concerns that Britain’s economic activity could slow in 2017 due to a consumer pay squeeze.
[Published 06:00 BST 17/05/2017]
Sterling slumped on Tuesday as the day’s UK inflation stats failed to impress. This made it easy pickings for a strengthening Euro, which has benefitted from increased market confidence in Eurozone stability since the inauguration of new French President Emmanuel Macron
The Pound Euro exchange has lost over a cent since markets opened at the level of 1.1790 this week. On Tuesday, GBP EUR hit a low of 1.1638 – its worst levels since the end of March.
Pound (GBP) Fails to Benefit from UK Inflation Stats
Tuesday saw the publication of Britain’s highly anticipated April Consumer Price Index (CPI) results, which beat expectations and saw UK inflation draw even closer to 3%.
The year-on-year inflation rate beat projections of 2.6% by rising from 2.3% to 2.7%, while monthly inflation came in at 0.5% instead of 0.4%.
However, investors weren’t encouraged by the data and the Pound Euro exchange rate spent most of the day falling.
This is because the inflation report comes so soon after the Bank of England’s (BoE) May policy decision, in which it predicted inflation of 2.8% in 2017 but still showed no intention of tightening UK monetary policy before 2019.
After the inflation report came in, analysts were more concerned about how rising inflation may affect Britain’s economy. Andrew Sentance from PwC stated;
‘Inflation has risen to its highest level since the Autumn of 2013, and this is adding to the squeeze on consumer spending shown in the latest retail sales figures. We should expect this rise in inflation to continue as the impact of the weakness if the pound feeds through into higher prices for imported goods and services.
Inflation is set to rise to around 3pc or higher in the months ahead – with prices likely to be rising faster than wages. The resulting squeeze on consumer spending will reinforce the slowdown in economic growth we are now seeing.’
This puts Wednesday’s upcoming wage growth stats in focus.
Euro (EUR) Surges as Eurozone Stability Outlook Improves
The Eurozone outlook and the outlook for its shared currency has improved notably in recent weeks, starting with the election of pro-EU Emmanuel Macron as France’s next President, followed by Macron’s promising first few days in office this week.
Macron picked the centre-right Édouard Philippe as his prime minister, which improved market confidence that Macron would find support among republicans.
This was followed by news from Macron’s first meeting as French President with German Chancellor Angela Merkel.
Two of the most powerful figures in Europe came together to call for a ‘historic reconstruction’ of Europe and the Eurozone. Macron and Merkel both appeared to favour the idea of treaty changes in order to strengthen the Eurozone.
Carsten Brzeski, economist from ING Germany, stated to CNBC;
‘With political risks fading away, the macro story is surfacing. And it is a positive story. Just confirmed by strong gross domestic product data in the first quarter. (I) think that markets are gradually realizing that the Eurozone economy could be the big positive surprise of the global economy this year’.
The Gross Domestic Product (GDP) data he speaks of was the Eurozone’s second preliminary Q1 GDP report, published on Tuesday. Eurozone growth looked to come in at 1.7% year-on-year and 0.5% quarter-on-quarter, a solid growth rate which has left EUR investors increasingly confident.
Pound Euro Forecast: Eurozone Inflation Could Alter ECB Bets
Wednesday will be another key session for the Pound Euro exchange rate.
While investors expect the Eurozone’s April Consumer Price Index (CPI) to meet expectations at 0.4% month-on-month and 1.9% year-on-year, a deviation from this could cause big Euro movement.
Worse-than-expected inflation could cause the Euro to shed much of this week’s gains, while strong inflation stats could cause GBP EUR to fall even deeper towards the end of the week.
If inflation beats expectations in the Eurozone, markets are likely to begin speculating on European Central Bank (ECB) monetary policy again.
The bank has recently maintained that policy will remain frozen until the end of its quantitative easing (QE) program, but some analysts have suggested that reduced political uncertainty could make the ECB a little more hawkish.
Wednesday also sees the publication of Britain’s March employment datasets and April jobless claims.
GBP investors will be focused on wage growth data. If UK wage growth beats expectation it will bolster hopes of UK economic resilience and help the Pound Euro exchange rate recover.