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Pound Sterling to Euro Exchange Rate Recovers from Worst Levels as UK Retail Sees Strong Rebound

Pound to Euro Exchange Rate Rebounds on UK Data and Eurozone Political Uncertainties

While still well below the week’s opening levels, the Pound Sterling to Euro (GBP/EUR) exchange rate did recover from its worst levels on Thursday as markets digested Britain’s latest, surprisingly strong UK retail sales rebound.

Due to Italian political jitters, GBP/EUR climbed a cent from 1.1336 to 1.1439 last week. This week GBP/EUR has slipped and has generally trended close to the level of 1.1400. At the time of writing, GBP/EUR had recovered to near 1.1420.

The pair tumbled at the beginning of the week as Brexit and UK economic uncertainties weighed heavily on the Pound (GBP). Since then, GBP/EUR has been slowly recovering amid persistent Eurozone concerns, despite mixed UK data.

On Wednesday evening, Italy’s President Sergio Mattarella agreed to grant Giuseppe Conte permission to become Italy’s next Prime Minister and to form a cabinet. This has kept investors jittery about Italy’s upcoming populist government.

Pound (GBP) Exchange Rates Recover on Surprising Rebound in UK Retail Activity

Analysts had expected Britain’s retail sector to see a modest rebound in April following the poor performance seen in Q1, but were surprised by just how strong the rebound turned out to be.

British retail sales were forecast to have recovered from -1.2% to 0.7% month-on-month, but jumped from a revised -1.1% to 1.6%.

Similarly, the key year-on-year figure climbed from a revised 1.3% to 1.4%, rather than slumping from 1.1% to 0.1% as forecast. The figures excluding fuel also came in well above predictions.

Sterling’s recovery versus the Euro (EUR) was boosted by the report, but its gains were still limited. Analysts noted that Britain’s long-term retail trends had overall slowed significantly. According to Rob Kent-Smith from the Office for National Statistics (ONS):

‘Retail sales bounced back in April, as petrol and other sales recovered from the snowfall. But the underlying position remains subdued, with the volume of goods sold over the last six months broadly unchanged.

Over the longer term, retail sales growth has slowed considerably, with increases in food, household goods and internet retailers being largely offset by declines across all other types of retailing.’

Euro (EUR) Exchange Rates Unable to Hold as Italian Political Jitters Persist

The Euro was unable to prevent the Pound’s recovery, despite the British currency’s limited strength.

This has been due to weakening confidence in the Eurozone bloc, amid this week’s Eurozone data and political developments.

Wednesday saw Italy’s President grant Giuseppe Conte permission to begin forming a new government.

As Italy’s next Prime Minister, Giuseppe Conte will lead a cabinet and government made up of populist parties the 5-Star Movement and the League party.

With two populist parties in power, markets are anxious that Eurosceptic mindsets or policies could become more common in Italian politics, which has made the Euro a less appealing buy.

On top of slipping political confidence, underwhelming data, weaker Eurozone consumer confidence survey data from May, and a slip in German consumer confidence in June have weighed on the Euro.

Germany’s final Q1 Gross Domestic Product (GDP) results met projections and had little notable impact on the shared currency today.

Pound to Euro (GBP/EUR) Forecast: UK Growth Projections Ahead

As a stronger-than-expected UK retail sales report was not enough to notably boost Bank of England (BoE) interest rate hike bets on Thursday, Friday’s UK growth report may instead if it beats expectations.

UK Gross Domestic Product (GDP) is currently projected to have slowed from 0.4% to 0.1% quarter-on-quarter, and from 1.4% to 1.2% year-on-year.

If the growth projection is revised higher, investors may become more confidence in Britain’s economic resilience. This could cause hopes of higher domestic inflation and maybe a BoE interest rate hike later in the year.

BoE interest rate hike bets slumped this week, following an unexpected slip in UK inflation. Unless inflation hopes pick up, BoE rate hike bets could remain low too.

This and ongoing Brexit uncertainties are keeping the Pound unappealing.

The Euro, on the other hand, will likely react to incoming Italian Prime Minister Giuseppe Conte’s picks for Italy’s government.

If the cabinet picks are perceived as being ones with Eurosceptic tendencies, the Euro is likely to remain weak.

Ifo’s May business confidence data from Germany also has the potential to influence the Pound to Euro (GBP/EUR) exchange rate’s movement towards the end of the week.