In the wake of Thursday’s disappointing CBI retailing reported sales index the mood towards the Pound remained generally bearish.
Although forecasts had pointed towards a modest slowing on the month investors were surprised to find that the index had instead plunged from 42 to -36.
This suggests that stagnant wages and persistent Brexit-based uncertainty are likely to limit retail spending in the coming months, likely resulting in weaker economic growth in the fourth quarter.
Even so, markets still expect the Bank of England (BoE) to raise interest rates at its November policy meeting in spite of this latest sign of softness.
As a result the Pound Euro exchange rate may well return to an uptrend in the coming days, with investors excited by the prospect of a return to tighter monetary policy.
However, if Monday’s raft of consumer lending data proves discouraging this could undermine the case for an imminent rate hike.
With some policymakers already less-than-convinced by the wisdom of a November rate hike, any further signs of weakness within the domestic economy may cause a greater split within the Monetary Policy Committee (MPC).
Euro Quick to Recover from ECB Dovishness on Signs of Rising Inflation
While the European Central Bank (ECB) took a more dovish tone in its policy announcement this failed to keep the Euro under pressure for long.
Even though the ECB looks likely to keep its quantitative easing programme running for many months to come, making the prospect of any interest rate rises even more distant, the single currency soon shrugged this off.
This was due to better-than-expected German import price index figures, which pointed towards a solid uptick in inflationary pressure as the measure rose from 0.0% to 0.9% on the month in September.
Signs of stronger inflation within the Eurozone could encourage the ECB to adopt a more hawkish view in the coming months, boosting the Euro.
As researchers at Societe Generale noted:
‘Given the erosion of yield support for the Euro in recent weeks, it is vulnerable now that the anticipated ECB QE tapering is a done deal. ECB President Mario Draghi noted in his comments that core inflation had yet to show a convincing upward trend. The market’s focus from here will be on whether inflation pressures in the euro area do indeed rise, as that would open the door for a more hawkish ECB.’
Further volatility is likely in store for the GBP EUR exchange rate on Monday, with the release of the October German consumer price index data.
A strong showing here could offer the single currency another rallying point, even though any shift in the ECB outlook is unlikely to materialise any time soon regardless.
Current GBP EUR Interbank Exchange Rates
At the time of writing, the Pound Euro exchange rate was trending lower in the region of 1.1256. Meanwhile, the Euro Pound exchange rate was making gains around 0.8882.