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Pound Softens vs Euro, US Dollar after Weaker-Than-Expected Retail Sales

With the future of the UK economy still far from clear and domestic retail sales contracting on the month the Pound weakened against its rivals.

  • December retail sales fell short of forecast – Appeal of Pound limited by weak data
  • Odds of ECB tapering quantitative easing program diminished – Euro faltered as Draghi took dovish tone
  • GBP USD exchange rate trended lower ahead of inauguration – Markets subdued by element of uncertainty
  • Political developments forecast to drive US Dollar outlook – Details of Trump’s economic plans could weaken ‘Greenback’

Volatility for both the Euro and US Dollar is expected in reaction to the swearing-in of Donald Trump, which could see the GBP USD exchange rate slide further ahead of the weekend.

Disappointing UK Retail Sales Weighed on GBP Exchange Rates

Confidence in the Pound (GBP) remained generally buoyed in the wake of Theresa May’s comments on Brexit, with investors encouraged by the greater level of clarity over the government’s strategy. Despite the confirmation that the UK will be leaving the single market Sterling was encouraged higher by signs that the government has a plan for negotiations, albeit adopting a harder line of rhetoric than hoped for. This positive mood limited the impact of a disappointing RICS house price balance, which fell short of forecast to clock in at 24% rather than 30% in December and suggested that the domestic housing market is not quite as strong as believed.

However, Sterling’s strength faltered when UK retail sales excluding fuel were found to have contracted -2% on the month in December. While some of this dip could be attributed to the large volume of sales seen in November, this nevertheless sparked concerns over the strength of consumer confidence within the domestic economy. As inflation is expected to rise further and wage growth is likely to be limited, the increasing squeeze on consumer spending power could weigh heavily on the appeal of the Pound.

Dovish ECB Commentary Weakened Euro (EUR) Outlook

The Euro (EUR) slumped sharply on Thursday as a result of the European Central Bank’s (ECB) January policy meeting. While it came as no surprise that policymakers had made no changes at this juncture, the dovish tone adopted by President Mario Draghi served to discourage markets. Once again talk of the quantitative easing program being tapered was dismissed, with the prospect of the ECB shifting from its accommodative policy stance diminishing. As researchers at Rabobank noted:

‘Draghi underscored that the inflation objective is defined for the Eurozone as a whole. The ECB won’t consider this condition to be fulfilled if inflation has met its target in a single member state or a group of member states rather than in the Eurozone as a whole.’

Thus, even though Germany continues to make solid progress towards the inflation target, the chances of the ECB raising interest rates in the near future remain slim at best. This limited the impact of December’s sharp uptick in German producer prices, keeping the Pound Euro (GBP EUR) exchange rate on an uptrend ahead of the weekend.

US Dollar (USD) Volatility Expected as Trump Takes Office

Markets have taken a jittery view of the US Dollar (USD) this week, discouraged by the lack of solid details regarding Donald Trump’s economic plans. Despite the optimistic outlook of US businesses, an element of uncertainty and unease continues to surround the new administration, which could limit the appeal of the ‘Greenback’ in coming days. Even so, as comments from Fed Chair Janet Yellen highlighted that the central bank remains on a tightening bias the underlying trend of the US Dollar has remained bullish.

Political developments are likely to remain the key influence on the Pound US Dollar (GBP USD) exchange rate for the foreseeable future. If the mood towards Trump begins to sour further this could knock the outlook of the ‘Greenback’, particularly if he shows signs of following through on his more protectionist policy threats. Even so, continued pledges of greater infrastructure investment and fiscal stimulus measures could offer the US Dollar continued support.

Current GBP EUR, GBP USD Interbank Exchange Rates

At the time of writing, the Pound Euro (GBP EUR) exchange rate was trending lower at 1.15, while the Pound US Dollar (GBP USD) exchange rate was slumped in the region of 1.22.