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GBP Forecast: Will Pound Euro, US Dollar Exchange Rates Fall on Retail Sales Data?

While the Pound (GBP) firmed against both the Euro (EUR) and US Dollar (USD) following the publication of better-than-forecast UK inflation and employment stats, Sterling exchange rates could swiftly fall back to their 2016 lows if the UK’s upcoming retail sales report falls short.

Economists have stated that robust consumer spending is essential if the UK is to avoid recession, so signs that the pace of spending is slowing in the post-Brexit environment would have a negative impact on GBP trading. Conversely, if the sales figures come in stronger-than-expected the Pound Euro, US Dollar exchange rates could achieve new weekly highs.

  • Rightmove House Price Index pointed towards further economic weakness – Pound remained biased to downside
  • Eurozone GDP data proved mixed – Worries over outlook and balance of currency union continued to weigh on the Euro
  • Doubts over possibility of 2016 Fed rate hike mounted – US Dollar set on bearish trend after disappointing domestic data
  • GBP USD exchange rate benefits from weaker US inflation – Softer CPI dents odds of Fed rate hike further

UK Jobs Data Sends Pound Sterling Higher

Pound Euro, US Dollar exchange rates extended recent gains on Wednesday as investors responded positively to the latest UK jobs data.

The UK’s unemployment rate held at 4.9% but the nation added more positions than forecast and average earnings increased in line with projections.

The GBP/EUR exchange rate was left trending in the region of 1.1560 after the report’s release.

(Previously updated 16/08/2016)

Pound Rallies after UK Inflation Results Prove Mixed

Confidence in the Pound (GBP) improved on Tuesday morning following a somewhat mixed set of UK inflation data, which showed a rise in some measures but weakness in others. Even so, investors reacted positively to the news, with the GBP USD exchange rate making strong gains in the region of 1.2969.

GBP EUR was trending in the region of 1.1520.

However, Pound Euro exchange rate gains were limited in light of the fact the ZEW economic sentiment measures for Germany and the Eurozone improved on previous figures. The German Current Situation index also climbed from 49.8 to 57.6 in August. Investors were encouraged to see that the currency union had strongly recovered from the initial negative impact of the Brexit shock, rising hopes for stronger ecostats to follow.

The appeal of the US Dollar remained decidedly weak following the latest US CPI data, which showed inflation dipping further than forecast to clock in at 0.8% rather than 0.9%. This suggested that the Federal Reserve will have less incentive to hike interest rates in the near future, prompting the ‘Greenback’ to extend its losses.

(Previously updated at 08:51 on 16/08/2016)

Weak Empire Manufacturing Index Dented US Dollar (USD) Demand

Investors were not impressed to find that the Empire Manufacturing Index had fallen significantly short of forecast in August, dipping to -4.21 rather than strengthening to 2 as expected. This prompted the US Dollar to weaken further, although the GBP USD exchange rate remained on a downtrend in the region of 1.2874.

(Previously updated at 14:31 on 15/08/2016)

The appeal of the US Dollar (USD), on the other hand, has been generally muted thanks to increasing market speculation that the Federal Reserve will not raise interest rates in the near future, despite hawkish policymaker commentary.

As the European session progressed, the Pound Euro exchange rate dropped to a low of 1.1505 – over 15 cents lower than the 1.31 level achieved immediately before the results of the Brexit were announced.

The Pound US Dollar exchange rate also fell, sliding all the way to 1.2867.

(Previously updated 09:30 GMT)

Weaker UK House Prices Drag on Pound (GBP) Exchange Rates

Despite the latest Rightmove House Price Index pointing towards a further slowing in the UK housing market, this failed to particularly weigh on Pound (GBP) exchange rates. Nevertheless, the result was not overly encouraging, considering that prices dipped -1.2% on the month following July’s earlier weakness. Demand for Sterling remains generally muted thanks to doubts over the effectiveness of the Bank of England’s (BoE) latest raft of monetary loosening measures, particularly as expectations rise for policymakers to maintain their dovish bias for longer.

Greater market volatility should be expected in response to Tuesday’s UK Consumer Price Index report, which could exacerbate concerns over the outlook of the domestic economy. Should inflationary pressure be found to have increased sharply in the wake of the vote to leave the EU then the Pound could slump against its rivals. Higher inflation would seem to vindicate the BoE’s decision to cut interest rates in August, but even so the apparently limited impact of the move could see this add to the downside pressure on Sterling.

Stronger-than-Expected German GDP Fails to Keep Euro (EUR) on Bullish Form

Ahead of the weekend demand for the single currency (EUR) was boosted by a stronger-than-expected second quarter German GDP. Investors had anticipated that growth would slow from 0.7% to 0.2% on the quarter, leading to a pleasant upside surprise when the provisional figure instead clocked in at 0.4%. This helped to outweigh the impact of more disappointing Italian and French data, as both major Eurozone economies were shown to have stagnated in the second quarter. Altogether this did not create the most encouraging picture, though, causing the Euro to  return to a weaker footing on Monday morning.

Support for the common currency could materialise on the back of the ZEW Economic Sentiment Surveys for August, which are forecast to show a strong recovery in both Germany and the wider Eurozone. Signs of improved confidence within the currency union could prompt markets to favour the Euro, suggesting that the impact of the Brexit vote has been more minimal than feared. If sentiment failed to pick up significantly on the month, however, the Pound to Euro (GBP EUR) exchange rate is likely to make further gains.

Demand for US Dollar (USD) Remains Muted on Weaker Odds of Fed Rate Hike

Friday’s raft of disappointing US data has left the ‘Greenback’ (USD) on a bearish trend, with the world’s largest economy failing to demonstrate the strength that investors had been hoping for. Stagnant Advance Retail Sales and a more limited uptick in the University of Michigan Confidence Index prompted markets to dial back their predictions for the timing of the next Federal Reserve rate hike. Although the US economy has demonstrated signs of robustness, these have been muted by recent disappointing data, diminishing the impetus on the Fed to tighten monetary policy amidst persistent negative global headwinds.

This afternoon’s Empire Manufacturing Index is forecast to strengthen on the month, a result which would encourage some degree of optimism in the manufacturing sector. However, a stronger showing here could be soon eclipsed by the latest US CPI report. Expectations are not high for the inflation data, with researchers at Nomura noting:

‘We expect headline CPI to increase by 0.09% m-o-m (+0.95% y-o-y) in July. Headline CPI inflation probably slowed slightly following a 0.2% advance in the previous month.’

As weaker levels of inflationary pressure would offer the Fed no reason to return to its monetary tightening cycle in the near future, this would likely boost the Pound to US Dollar (GBP USD) exchange rate. Even so, a stronger showing could encourage investors to pile back in to the safe-haven currency.

Current GBP, EUR, USD Exchange Rates

At the time of writing, the Pound to Euro (GBP EUR) exchange rate was trending narrowly around 1.1570, while the Pound to US Dollar (GBP USD) pairing was making modest gains in the region of 1.2921.