EUR/GBP climbs slightly amid weak German sentiment, stable UK outlook

• EUR/GBP trades slightly higher at the start of the week, amid mixed macroeconomic data from the Eurozone.
• Business confidence indicators in Germany confirm a fragile economic recovery, limiting potential support for the single currency.
• Pound Sterling stabilizes after strong UK data, as attention shifts to the next Bank of England policy meeting.

EUR/GBP trades around 0.8680 on Monday at the time of writing, up 0.10% on the day. The pair draws modest support from the Euro (EUR), even though the latest macroeconomic data from Germany have failed to generate any meaningful momentum in the foreign exchange market.

In Europe, the German IFO Business Climate Index remained unchanged at 87.6 in January, falling short of expectations for an improvement to 88.1. The Current Assessment index edged slightly higher to 85.7 from 85.6 in December, while the Expectations index deteriorated marginally to 89.5 from 89.7 previously. These figures confirm that German business sentiment remains stuck at low levels, reflecting still-fragile economic momentum in the Eurozone’s largest economy.

On Friday, preliminary Purchasing Managers’ Index (PMI) data delivered mixed signals, with the manufacturing sector improving, although it remains in contraction territory, and the services sector continuing to expand, but at a slower-than-expected pace.

These releases provided only limited support to the Euro, as investors continue to assess growth prospects and monetary policy expectations in the Eurozone. In this context, market reaction remains subdued, explaining the modest advance in the EUR/GBP pair.

On the UK side, Pound Sterling (GBP) steadies after a sharp rebound at the end of last week. The move was driven by better-than-expected UK economic data, notably the January S&P Global PMI figures, which showed an acceleration in private sector activity. The Composite PMI rose to 53.9, well above expectations and the previous reading. In addition, Retail Sales returned to growth in December, rising by 0.4% after two consecutive monthly declines, according to data published by the Office for National Statistics (ONS).

The week ahead looks relatively light in terms of UK economic releases, which is likely to leave greater room for market sentiment and speculation surrounding the Bank of England (BoE) policy meeting in February. At its last meeting, the central bank indicated that monetary policy was set on a gradual easing path. However, some Monetary Policy Committee (MPC) members have recently stressed the need for caution, pointing to persistent risks linked to wage growth and inflation expectations.