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Pound to Euro Exchange Rate Rebounds from Lows on UK Retail Sales Jump

Pound to Euro Exchange Rate Recovers Ahead of European Central Bank (ECB) Decision

Signs of weak price pressures in Britain have given investors little reason to believe the Bank of England (BoE) will hike UK interest rates in the coming months, and this has left the Pound to Euro (GBP/EUR) exchange rate unappealing.

Since opening this week, GBP/EUR has largely been trending nearer the level of 1.1340. GBP/EUR briefly recovered to near the week’s opening level of 1.1388 on Tuesday, but poor UK data dragged the pair lower again.

GBP/EUR tested a low of 1.1326 earlier in the week and the pair could hit those lows again before the end of the week if upcoming Eurozone news impresses.

However, following the publication of Britain’s May retail sales results, GBP/EUR climbed again and trended nearer 1.1360.

UK retail sales performed much better than forecast in May, with the year-on-year print rising from 1.4% to 3.9% rather than the predicted 2.4%. This helped Sterling (GBP) recover from its lows.

Demand for the Euro (EUR) has been sturdy in anticipation of the European Central Bank’s (ECB) June policy decision on Thursday, but Eurozone inflation data due on Friday could prove influential too.

Pound (GBP) Exchange Rates Pressured by UK Data

Most of this week’s UK data has been underwhelming, and has caused investors to rethink the Bank of England’s (BoE) optimism on Britain’s economic outlook.

While BoE officials have argued that Britain’s economic performance would improve from Q2 onwards, recent UK data has suggested that UK price pressures may be too subdued to make the Bank of England hike UK interest rates in the coming months.

As both wage growth and UK inflation printed short of expectations this week, there are concerns that Brexit uncertainties and the worn off effect of Sterling’s plummet are keeping inflation at bay.

While inflation and wage rates are still above the Bank of England’s targets for now, UK inflation failed to climb in May despite forecasts. This indicated to investors that the rate could fall further.

According to Alastair Wilson from Zurich:

‘With inflation now within touching distance of the Bank of England’s 2 per cent target, the Bank’s Monetary Policy Committee will be feeling less pressure to raise rates, and they may well now hold fire until later in the year,’

Thursday’s UK retail sales results beat forecasts, so Pound investors now highly anticipate the Bank of England’s (BoE) view on UK data during its policy decision next week.

Euro (EUR) Exchange Rates Steady Ahead of European Central Bank

Despite some mixed Eurozone ecostats this week, the Euro has been able to hold most of its gains versus the Pound due to market anticipation for the European Central Bank’s (ECB) June policy decision.

The bank is expected to discuss its plans for withdrawing aggressive quantitative easing (QE) schemes by the end of the year.

Signs that the bank is still planning to taper QE in 2018 have made investors more hopeful that the bank is not hugely concerned about Eurozone political jitters or US trade developments.

However, the Euro’s gains against Sterling could have been stronger if recent Eurozone data hadn’t been disappointing.

While Germany’s final May inflation results met forecasts, the Eurozone’s April industrial production report underwhelmed investors yesterday and ZEW’s June economic sentiment survey results showed a sharp drop in confidence on Tuesday.

Pound to Euro (GBP/EUR) Forecast: Eurozone Inflation Results Ahead

Following Thursday’s European Central Bank (ECB) policy decision, the Pound to Euro (GBP/EUR) exchange rate is unlikely to see any more major moves this week – unless Friday’s Eurozone inflation report impresses.

The Eurozone’s final May Consumer Price Index (CPI) results will be published on Friday morning, and if they beat forecasts it could leave the Euro stronger as ECB tightening bets would rise.

Eurozone inflation is currently forecast to have improved from 0.3% to 0.5% month-on-month and from 1.2% to 1.9% year-on-year. The core yearly rate is forecast to have climbed from 0.7% to 1.1%.

If the data beats forecasts, investors will become more optimistic about the chances of the ECB taking a more hawkish stance on Eurozone monetary policy in general. This would leave the Euro more appealing.

The Eurozone’s April trade balance report will be published on Friday too.

As for the Pound, not much notable UK data will be published next week – but the Bank of England (BoE) will hold its June policy decision.

Any reaction from the bank regarding recent UK inflation or retail sales results could have a notable impact on the Pound to Euro (GBP/EUR) exchange rate.