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Pound Euro, US Dollar Exchange Rates Weaken After UK Retail Sales Fall Short of Forecast

As Theresa May heads to her first EU summit the appeal of Pound (GBP) exchange rates has remained limited, allowing the Euro and US Dollar to make fresh gains.

  • Pound (GBP) down with UK retail sales weaker than forecast– Inflation worries point towards further decline in consumer spending
  • Euro (EUR) trending higher in anticipation of ECB meeting – Less dovish Draghi comments predicted to boost single currency further
  • Fed rate hike odds continue rising – US Dollar on stronger footing as markets eye imminent return to monetary tightening cycle
  • GBP exchange rates forecast to soften on deficit concerns – High level of government borrowing could put fresh pressure on the Pound

Confidence in the Euro has remained high despite markets anticipating no policy changes from the ECB’s October meeting, with the central bank expected to adopt a less dovish outlook.

Pound (GBP) Remained Under Pressure on Disappointing UK Retail Sales

Pound (GBP) exchange rates were prompted to return to a weaker footing on Thursday morning in response to September’s UK retail sales data. Sales ultimately fell short of forecast, stagnating on the month and dipping from 6.6% to 4.1% on the year. This suggests that there has already been some weakening in consumer spending, a trend that is likely to be exacerbated by rising inflationary pressure over the coming months. As a result, GBP EUR and GBP USD exchange rates trended lower, with the underlying mood towards Sterling remaining bearish.

Friday’s public sector net borrowing report could undermine the appeal of the Pound further, with concerns over the UK deficit having heightened in the wake of the referendum result. A higher level of government borrowing would point towards a widening deficit, a worrying prospect given the still uncertain nature of the UK’s future outside the EU. Should the figure surprise to the downside though the Pound could find a temporary rallying point. However, with Prime Minister Theresa May heading to her first EU summit, speculation over Brexit is likely to remain the predominant driver of Sterling sentiment.

Pound Euro Exchange Rate Weakness Forecast on More Hawkish ECB Comments

Ahead of the European Central Bank’s (ECB) October policy meeting demand for the Euro (EUR) has remained relatively strong, with the Pound Euro exchange rate coming under pressure as a result. Investors have continued speculating that the ECB could be discussing the possibility of tapering its quantitative easing program in the near future, a more hawkish outlook that has seen the single currency shored up. However, with action unlikely at this juncture and inflation still a long way from the central bank’s 2% target this latest boost to the Euro may soon begin to fade.

Of particular interest to markets will be the accompanying commentary from ECB President Mario Draghi, with his tone expected to offer hints as to the likely direction of the December meeting. Should Draghi continue to adopt a less dovish outlook then the Pound to Euro (GBP EUR) exchange rate looks set to trend lower, as researchers at TDS note:

‘We look for Draghi though to refrain from discussing how to tweak the QE parameters and leave that decision entirely for December, but we also look for him to fail to deny that the ECB may taper after March, leaving markets with a more hawkish tone.’

Increased Fed Rate Hike Bets Keep Pound US Dollar Exchange Rate Lower

Despite Wednesday’s mixed US housing data US Dollar (USD) exchange rates have been trending higher on Thursday morning, in part buoyed by the decreasing odds of Donald Trump claiming victory in the US presidential race. A Clinton win is viewed as preferential by markets, boosting the chances of the Federal Reserve opting to raise interest rates in December. Investors were also encouraged by more hawkish comments from Fed Vice-Chair William Dudley, who indicated that he expects a return to the monetary tightening cycle in the near future.

Volatility could be in store for the Pound to US Dollar (GBP USD) exchange rate with the publication of the latest US jobless claims figures. Should these point towards a stronger labour market, the odds of a Fed rate hike are likely to strengthen, encouraging investors to continue piling into the ‘Greenback’. On the other hand, if October’s Philadelphia Fed Index weakens from 12.8 to 6 in line with forecasts then confidence in the robustness of the US economy could falter.

Current Interbank Exchange Rates

At the time of writing, the Pound to Euro (GBP EUR) exchange rate was trending lower in the region of 1.11, while the Pound to US Dollar (GBP USD) pairing was slumped around 1.22.