Demand for the Euro faded on Friday afternoon, allowing the Pound to Euro exchange rate to recover from its weekly lows.
However, GBP EUR still looked to end the week below its opening levels and may struggle to recover next week.
Even if Britain’s Q4 2016 Gross Domestic Product (GDP) results impress traders, concerns will remain about 2017’s growth outlook.
If the Eurozone’s upcoming February PMI figures and final January Consumer Price Index (CPI) results impress investors, the Euro may have even more defense against the Pound.
[Previously updated 13:01 GMT 17/02/2017]
The Pound to Euro exchange rate continued to fall on Friday as Britain’s January retail sales results disappointed – just as some analysts had feared.
UK retail sales contracted at -0.3% month-on-month, failing to improve to 0.9% as forecast. December’s retail sales were also revised even lower to -2.1%.
Year-on-year retail sales slowed significantly from 4.1% to 1.5%, well below the expected 3.4%.
As the retail sector disappointed, analysts speculated that it was likely due to the Pound’s drop in value finally hitting UK consumers in the pocket.
Concerns that UK retail activity could continue to fall throughout 2017 weakened the Pound considerably on Friday. This caused GBP EUR to fall back down to the level of 1.16.
[Previously updated 16:25 GMT 16/02/2017]
Towards the end of Thursday’s European session, the Pound to Euro exchange rate trended the week’s opening levels at the level of 1.17. The pair trended near its worst weekly levels.
Sterling remained limp throughout the day as traders, disappointed with the week’s UK data, anticipated Friday’s UK retail sales results.
If January’s UK retail sales impress traders, the Pound could recover as concern about slowing UK growth fades. However, GBP EUR could hit fall towards new weekly lows if they disappoint.
Friday’s Eurozone construction output results are unlikely to be highly influential and as a result the Pound will likely be taking point in Friday movement.
[Previously updated 12:43 GMT 16/02/2017]
For most of Thursday morning, the Pound to Euro exchange rate trended near the week’s opening levels after having lost most of its weekly gains on Wednesday.
Ahead of Friday’s UK retail sales results, underwhelming UK wages and inflation stats from earlier in the week continued to weigh on the Pound.
Sterling’s strength against the Euro was also limited by a French senate report indicating France’s position on Brexit. The report says Britain must not get a deal that makes it better off than it is now.
This, as well as an increase in demand for EUR USD, helped the Euro to hold its ground against the Pound on Thursday.
[Published 06:00 GMT 16/02/2017]
The Pound to Euro exchange rate trailed back towards the week’s opening level during Wednesday’s European session.
The day’s UK employment stats disappointed Pound traders, causing GBP EUR to fall from its weekly highs of 1.18 despite weakness in the Euro.
Slowing UK wage growth was the main takeaway of the report for GBP traders. UK wage growth slowed to 2.6% in both bonus and excluding bonus prints in the three months leading into December.
Analysts predicted that UK wages including bonus would hold at 2.8%, while the print excluding bonuses was expected to hold at 2.7%.
The slow in wage growth, coupled with a strong UK inflation outlook this year, has worsened concerns that British citizens may face a financial squeeze during the Brexit process in the coming years.
Analysts predict that UK inflation will reach 3% in 2017. The UK government will begin the Brexit process in March and this could also worsen inflation if the Pound falls further. The UK jobs outlook could also worsen as businesses pull out of the UK.
If UK inflation continues to outpace wage growth, consumer-driven sectors like retail and services could see a huge drop in activity that would lead to slower economic growth.
The Bank of England (BoE) has also indicated in recent months that it will not hike UK interest rates unless the nation sees inflation that isn’t merely influenced by a weaker Pound.
Rachel Smith, labour market economist from CBI, had the following to say about the UK job data;
‘Pay growth remains stubbornly sluggish, which is a concern given rising inflation. There are tentative signs that productivity is picking up, but there is further to go before it can underpin faster wage growth.
Companies will be looking to the Budget to see adjustments to business rates along with measures to boost educational performance, helping firms to drive faster productivity growth.’
All these UK economic concerns have made it easy for the Euro to recover most of its losses against the Pound this week.
This week’s Eurozone news has been generally underwhelming, however. Q4 2016 Gross Domestic Product (GDP) results from the bloc failed to meet expectations on Tuesday.
While the bloc continued to grow at a modest pace of 1.7% year-on-year in the final quarter of 2016, it failed to print at 1.8% as analysts expected.
This, as well as persistent concerns of rising populism in the Eurozone, have left the Euro limp this week.
Traders have been increasingly concerned that the Eurozone could be fundamentally undermined if a nationalist politician wins Eurozone general elections in 2017.
Many nationalist parties have expressed a desire to withdraw their nation from the Eurozone and ditch the Euro. Analysts perceive this as one of the biggest threats to the shared currency’s future.
Florian Baier, economist at Fathom spoke about this year’s upcoming French election, in which nationalist Marine Le Pen has been gaining popularity;
‘It is not our central scenario that she (Le Pen) wins, but the risk scenario is that she wins as the chances of that happening is higher than what is priced into the markets. If Le Pen wins the French election then it is the end of the euro area as we know it.’
As a result of these notable underlying risks in Euro trade, the Pound still has a solid chance to end the week higher against the Euro. However, this Friday’s UK retail sales results will need to impress for the Pound to hold its ground until the weekend.
Movement in the Pound to Euro exchange rate will be quiet throughout Thursday’s session due to a lack of fresh influential prints. Instead, traders will look ahead to Friday’s UK retail sales from January – the first UK retail figures of the year.
Analysts predict retail sales will slow from 4.3% to 3.4% year-on-year, but will improve from -1.9% to 0.9% month-on-month.
If these results come in below expectations, concern will rise among traders that UK consumers really will spend far less in 2017 because of inflation surges.
This would be a bad end to an already disappointing week for Sterling traders and could see GBP EUR fall back to the week’s opening levels or lower.
The Pound to Euro exchange rate may also be influenced towards the end of the week by the key G20 finance ministers meeting. The Euro in particular could benefit if finance ministers indicate they intend to help the European Central Bank (ECB) with Eurozone economic recovery.